Investors may sway state-run banks' boardroom dynamics

Higher voting rights, possible board representation likely to boost investor participation, subject public sector banks to unfamiliar shareholder activism

The Cabinet-approved Banking Amendments Bill proposing a rise in public sector bank shareholders’ voting rights may see investors vie for larger stakes and a greater say. The cap on voting rights is proposed to be raised from one to 10 per cent in public sector banks (PSBs) and from 10 to 26 per cent in private sector banks. The Bill will now go to Parliament.

In essence, it means the government is opening doors for investors who want to have voting rights and a say in the working of PSBs — a move many see as positive. Earlier, even if an investor held more than one per cent in a PSB, their voting rights were limited to one per cent. For instance, Lazard Asset Management LLC (a foreign institutional investor) held 4.6 per cent in Punjab National Bank at March-end. However, its voting rights were limited to one per cent. Now, the FII may feel encouraged to raise its stake for more voting powers.

Ashwin Parekh, partner (financial services), Ernst & Young, said, “This is a constructive change, as there has been improvement in the working of state-owned banks due to competition. The increase in investors’ interest (institutional investors) will bring in further improvement in governance.”

Industry officials said domestic and foreign institutional investors (FIIs), with substantial holding, would get a chance to seek a board seat. There could be one board seat that may come to FIIs or non-government shareholders.

With PSBs accounting for over 70 per cent of banking assets, their equity capital requirement is going to be huge. But given the state of government finances, it may think of lowering the threshold for its minimum stake below 51 per cent to facilitate fund-raising from the market. The move may be a precedent to that as well because it will encourage institutional investors to participate in any equity offering by PSBs.

There could be a couple of hurdles. For one, according to Reserve Bank of India guidelines, any investor can hold stake in a bank only up to five per cent. Any investor wanting to hold above this limit needs the banking regulator’s permission.

Another hindrance, many say, could be the government’s tight grip on the working of PSBs. The government has been asking banks to hike exposure to retail loans, review rate policies (effectively, cut lending rates) and so on. That may sour any potential investor’s mood.

An industry official said, “Decisions like waiving off farm loans would be debated more in board meetings if there are non-government officials present.” A senior India Banks’ Association official says at present it is the government that calls the shots through its board nominees. Plus, the CMD and executive directors are its employees. “It will be a good beginning but it is going to be long-drawn process to see a shift in corporate governance at PSB boards,” added the official.

Hemindra Hazari, head of institutional equity research at Nirmal Bang Securities, said the move should give shareholders some say in management.