Monetising property: Advanced groundwork at Bank of India

Planning to raise Rs 2,500 crore if RBI okays its plan to do so via an SPV; presses govt to waive taxes on this

Government-owned Bank of India (BoI) could generate about Rs 2,500 crore by monetising its real estate assets, especially properties in metropolitan cities, for equity capital.

Explaining the arrangement for such a transaction, a senior BoI executive said the Mumbai-headquartered bank could float a wholly-owned subsidiary for the deal. The selected real estate assets (buildings, head office premises and residences) would be transferred (formally, sold) to this subsidiary, a Special Purpose Vehicle (SPV), at value.

He said the bank had been working for about six months on a proposal involving valuation and the estimate of benefit and tax burden. The market value of real estate assets is pegged around Rs 6,000 crore. The book value could be Rs 2,800-3,000 crore. The bill for tax, stamp duty and fees could be about Rs 500 crore.

After deducting expenses, the gains (estimated at Rs 2,500 crore) would straightaway add to the bottom-line and bolster the capital adequacy ratio. BoI's capital adequacy was 9.97 per cent (by Basel-III norms) at the end of March this year.

BoI would pay rentals to the subsidiary for using space. This subsidiary will need capital infusion from the parent bank. It will raise debt for buying out real estate assets of the bank.

Before such a transaction fructifies, BoI will have to get past two challenges. First, securing approval from the Reserve Bank of India (RBI). Second, clarity on paying taxes (exemption from capital gains and stamp duty).

Speaking to Business Standard last week, G S Sandhu, the Union government's financial services secretary, had said besides hiving-off non-core assets at good valuations, public sector banks (PSBs) can use their real estate to raise money from the market through an SPV. The government was working on a model in the case of BoI and talking to other banks too, he'd said.

While presenting the Union Budget for 2014-15 Finance Minister Arun Jaitley had said PSBs will need equity capital infusion of Rs 240,000 crore by March 2018 to be in line with Basel-III norms. With its huge fiscal deficit, the government is battling to rein in expenditure. It has limited resources to infuse capital in PSBs and has asked the latter to explore options such as offloading non-core investments and exploiting real estate assets.

Most of the properties which would give handsome gains to banks are situated in metropolitan areas such as Mumbai, Chennai and Delhi.

On the regulatory nod, a BoI executive said the bank had already sounded out RBI.

This transaction might attract capital gains and stamp duty, taking away a significant portion of the gains. The bank has made a plea to the government for minimal tax burden (read, exemption from capital gains tax), as the transaction is not a true sales but a transfer, he added.