Use of share premium for write-off to hasten IOB's return as dividend-payer

Bank recently informed bourses its board had approved the use of the balance available in the share premium account to write off its accumulated losses to present a fair view of its financial position

Indian Overseas Bank’s (IOB’s) decision to utilise the share premium money to write off losses is expected to expedite its return as a dividend-paying bank, says experts. The loss-making bank had last paid dividend to its shareholders nearly four years ago.
 
IoB last week said it was planning to write off its losses using the reserves. In a notice to exchanges, the bank said its board had approved the use of “the balance available in the share premium account, amounting to Rs 76.5 billion as on March 31, 2017, to write off the accumulated losses to the tune of Rs 69.8 billion as on March 31, 2017, to present a true and fair view of the financial position of the bank and to take the same into account during 2017-18”.
 
While questions have been raised by various sections on whether this will become a precedent for other banks to follow, R Subramaniakumar, chief executive of IOB, has justified the move, saying “this will not alter the liability, or change the position of assets, or tweak the shareholding”.
 
At present, Government of India is the largest shareholder in the bank, with a stake of about 82 per cent. LIC, with around 10 per cent, is the second-largest.
 
While refusing to comment on dividend payments, Subramaniakumar said: "We just want to give a true and fair picture of the balance sheet."
 
He added, the bank has taken the necessary approvals from the government and regulators before taking the decision, which it terms as “set-off” instead of write-off.
 
This exercise will also facilitate the bank in having surplus distributable items which is a necessary condition for considering the payment of coupon on AT-1 bonds.
 
The bank will convene an extraordinary general meeting of shareholders on January 30 for obtaining their approval. The Chennai-based lender’s loss had widened in the second quarter of 2017-18 to Rs 12.23 billion, compared with Rs 7.65 billion a year earlier. The bank’s gross non-performing assets (NPA) as a percentage of total advances stood at 21.77 per cent at the end of the second quarter.
 
Indian Overseas Bank is one of the undertakings for which the government had put strict criteria before offering capital. One of those was cutting losses and shedding non-core assets. The Reserve Bank of India (RBI) also put in place a prompt corrective action plan on the lender, greatly limiting its lending exercise on high-risk accounts.
 
Subramaniakumar is hopeful that the Bank will be a profitable one by 2018-19.