Central Bank pref share conversion gets govt nod

The Union Cabinet today approved the conversion of 71 per cent of Central Bank of India's equity capital into preference shares, a move that could hit a hurdle at the Reserve Bank of India (RBI).

Another wholly owned government bank, United Bank of India's proposal to covert 78 per cent of its Rs 1,532 crore equity capital has already been blocked by the RBI as the central bank is considering putting a ceiling of 40 per cent of equity capital for issue of preference capital in its proposed guidelines.

The RBI is yet to issue rules for amendments approved by Parliament to the Nationalisation Act, allowing banks to issue preference shares.

Also, the central bank is yet to issue guidelines for issue of preference shares. The RBI is considering placing a cap of 40 per cent of equity capital on preference capital.

The proposed conversion of Central Bank's capital would involve conversion of Rs 800 crore of equity capital into perpetual non-cumulative preferential capital, Chidambaram told reporters in New Delhi.

The interest rate on the preferential capital will be 75 basis points above the repo rate of 7.25 per cent. Going by the current repo rate, the interest on preference capital would be 8 per cent.

Central Bank has a paid-up capital of Rs 1,124 crore and its equity capital will reduce to about Rs 324 crore.

Subsequent to capital restructuring, Central Bank plans to raise equity capital through initial public offer (IPO) of up to 15 crore shares at a premium in the fourth quarter of 2006-07.

The total capital requirement of Central Bank is pegged at Rs 800-Rs 1,000 crore to support business growth and to be compliant in accordance with the revised capital adequacy framework as set out in Basel II norms, a senior Central Bank of India official said.