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There is an unwritten rule in investment banking circles that a company should raise money when it is available and not when it wants it. Euphoria in Indian markets, especially for banking stocks has prompted India’s largest bank – State Bank of India (SBI) to announce a fund raising proposal of Rs 15,000 crore. The bank, which is among the top picks of most of the brokers, especially foreign brokers, feels it is in a better position to raise the capital, despite some of the smaller banks delaying such plans.
In an interview to a newspaper, Arundhati Bhattacharya, chairman, SBI says "We want to complete all the formalities so that we are ready to hit the market at the appropriate time. We do not have a fixed time line, but it will give us a one-year window to tap the equities market once the formalities are done."
The bank is creating enough elbow room to raise capital though it does not need the money immediately. Bhattacharya has been quoted in another report as saying “If we seek permission at the actual time of raising capital, investors start taking positions on the stock. It is not necessary that we will have to raise the full amount, but we are seeking permission for the maximum amount because it gives us a lot of elbow room.”
SBI knows the importance of having a longer time frame when it comes to fund raising. The bank was desperate to raise money in 2014 but could not raise Rs 8,032 crore and finally LIC had to step in to subscribe the issue in January 2014. The current permission will give the bank a year to time its fund raising plans. Further, it has also taken permission to raise the said amount through various instruments. The bank is seeking permission for raising funds through a public issue or rights issue or private placement. They may also use the global depository receipt and American depository receipt route to raise the funds.
But what is in it for the investor? Will SBI’s announcement to raise capital anytime during the year create a liquidity overhang and prevent the stock from moving higher, which we see when divestment of public sector companies are allowed.
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In the case of SBI or other public sector banks this is unlikely to be the case. Firstly, because it is a known fact that Indian public sector banks will be regularly raising capital over the next four years to meet the Basel III targets. Moody’s had said that public sector banks would need to raise $37 billion (around Rs 2.22 lakh crore) over the next 4-5 years. Run-up in the banks over the past six months has been with full knowledge of the increase in capital in these banks.
Secondly, unlike divestments where the proceeds of divestment go to the government, these banks will be using the money raised as growth capital.
Raising more Tier I capital gives banks the opportunity to raise more money from other sources also as far as they are within the norms. This gives them the money needed to grow going forward. SBI is clearly gearing up to meet the growth challenges head-on learning from its past mistakes of raising funds when it can and not depending on the government to decide when it should.
