PSBs likely to go on a fundraising spree to reduce govt shareholding

Public sector banks (PSBs), especially the ones that have come out of prompt corrective action (PCA) framework, are likely to go on a fundraising spree, with the twin purpose of raising growth capital and bringing down government shareholding in the banks to 75 per cent. 

The dilution of government stake is essential to meet the 25 per cent public float norms mandated by Securities and Exchange Board of India (Sebi).

According to a senior official in a PSB, the Sebi had been giving dispensation to banks to extend the timeline to meet the free float norm on a case by case basis. However, for most PSBs, a series of capital infusion has taken the government stake to more than 90 per cent. Most of such banks have sought two years’ time to meet the Sebi norm, said a banker.

The options in front of banks to reduce government equity include through instruments such as QIP (qualified institutional placement), FPO (follow on public offer) or rights issue, among others. However, with market sentiments remaining muted, the fundraising might not be an easy task, especially for banks which are still under PCA. 

For example, Kolkata-based United Bank of India, which is still under PCA, might ask the government for disinvestment as raising market equity might be difficult, according to sources in the bank. The government equity in the bank is close to 95 per cent. 

“It is not going to be an easy task for the government to raise external equity. The banks need to see if there is enough appetite, especially markets remaining volatile ahead of elections. They have options such as QIP, FPO or rights issue,” said Karthik Srinivasan, group head, Icra. 

At Allahaband Bank, the government shareholding has gone up to about 91 per cent after the recent fund infusion of Rs 6,896 crore, according to a senior official at the bank. 

SS Mallikarjuna Rao, managing director and chief executive officer of Allahabad Bank, said the bank had to bring down the government shareholding to 75 per cent by October 2020, which is two year’s time from when the breach occurred. The bank is planning to raise about Rs 600 crore-Rs 700 crore in three to four tranches. Allahabad Bank came out of PCA. 

“Sebi has given two years window. By October 2020, the public shareholding should be 25 per cent. The breach occurred in October 2018, when with the infusion of Rs 1,179 crore, the capital gone from around 71.9 per cent to 79 per cent.  The requirement to reduce capital is around Rs 3,800 crore, which we cannot in one tranche, and go in four to five,” the Allahabad Bank MD had said recently. 

For other PSBs that have come out of PCA, the government holding is also quite high. For example, in Bank of India, the government holding as on February 16 was about 89.07 per cent. For Bank of Maharashtra, as on December 2018, it was about 87.01 per cent. For Oriental Bank of Commerce as on February 16, the government shareholding was 86.17 per cent. For Corporation Bank, it was about 86.77 per cent as on December 2018. 

Also, if the banks that have come out of PCA need to return and sustain profitability, they are in need for growth capital. The latest round of fund infusion of Rs 48,000 crore in PSBs will go towards meeting regulatory requirement. According to a latest report by Fitch that banks will need an additional $23 billion (around Rs 1.6 trillion) in 2019, after these latest injections, to sufficiently meet minimum capital standards alone.