 "LIC: Lot of bank shares, few votes")
On Friday, an Extraordinary General Meeting (EGM) of public sector lender Bank of India (BoI) will consider approval of a preferential issue of shares to Life Insurance Corporation of India (LIC).
LIC will get 1.6 million shares at Rs 96.63 each, a slight discount to the market price of Rs 97.95. Even so, there's a rider. The bank has mentioned in the EGM notice that: “The voting of LIC is restricted to 10 per cent of the total voting. Hence, issuance of fresh shares will not increase their voting right.”
Regulation 12(2) of the Banking Regulation Act said, “(2) No person holding shares in a banking company shall, in respect of any shares held by him, exercise voting right [on Poll] in excess of 10 per cent of the total voting rights of all the shareholders of the banking company.”
Further in terms of Section 3 (2E) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the voting right of LIC will be restricted to 10 per cent of the total voting right of all shareholders of a bank.
BoI is not an isolated case. According to shareholding data compiled by the BS Research Bureau, of the 21 public sector banks where LIC has shares, it owns more than 10 per cent in 18. In Corporation Bank, it has its highest stake at 21.22 per cent, followed by India Overseas Bank, Allahabad Bank, Central Bank, IDBI Bank, UCO Bank, Vijaya Bank and Oriental Bank of Commerce, where it has over 14 per cent stake. In the remaining banks, it has between 10 and14 per cent. In some banks, the shares are held by LIC and its various schemes.
LIC will get 1.6 million shares at Rs 96.63 each, a slight discount to the market price of Rs 97.95. Even so, there's a rider. The bank has mentioned in the EGM notice that: “The voting of LIC is restricted to 10 per cent of the total voting. Hence, issuance of fresh shares will not increase their voting right.”
Regulation 12(2) of the Banking Regulation Act said, “(2) No person holding shares in a banking company shall, in respect of any shares held by him, exercise voting right [on Poll] in excess of 10 per cent of the total voting rights of all the shareholders of the banking company.”
Further in terms of Section 3 (2E) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the voting right of LIC will be restricted to 10 per cent of the total voting right of all shareholders of a bank.
BoI is not an isolated case. According to shareholding data compiled by the BS Research Bureau, of the 21 public sector banks where LIC has shares, it owns more than 10 per cent in 18. In Corporation Bank, it has its highest stake at 21.22 per cent, followed by India Overseas Bank, Allahabad Bank, Central Bank, IDBI Bank, UCO Bank, Vijaya Bank and Oriental Bank of Commerce, where it has over 14 per cent stake. In the remaining banks, it has between 10 and14 per cent. In some banks, the shares are held by LIC and its various schemes.
After the proposed issue, LIC will hold 14.48 per cent in BoI. Thus, 95.52 per cent shares will be having effective voting rights.
“Though restriction of voting rights of LIC is legally correct, it is not in the interest of fairness of unit holders/policy holders of LIC, whose funds are invested by LIC in the bank,” said J N Gupta, managing director of Stakeholders’ Empowerment Services.
The deprival also means an economic loss for LIC. Voting rights are valued at a premium by investors, as can be seen by differential pricing of DVRs (shares with differential voting rights) traded in market. An e-mail seeking comments, sent to the LIC spokesperson on Monday, did not elicit any response. A comparison of prices of shares and DVRs of Tata Motors, Future Retail and Jain Irrigation showed the DVR traded at a substantial discount to the shares. On April 21, the Tata Motor DVRs were trading at Rs 300, a discount of 27.7 per cent to the shares which were at Rs 411.
In addition, the DVRs, which give the holder one vote for every 10 held, are eligible for five per cent additional dividend.
If the voting rights meant nothing, the DVRs should have been trading equal to the share prices. But, this unrealised upside has been there for long and shareholders have not exploited it.
This means the markets are valuing their voting rights correctly and paying premium for the same, SES analysts concluded.
Based on this, SES calculated that voting rights accounted for 34 per cent of the value in Tata Motors shares, 55 per cent in Future Retail shares and 41 per cent in Jain Irrigation shares.
The Banking Laws (Amendment Act, 2012) provides that voting rights can be increased in a phased manner from 10 per cent to 26 per cent with permission from the Reserve Bank. Gupta of SES said, “We are of the view that when voting limits can be increased up to 26 per cent, no logic is found in restricting voting right to 10 per cent and for an institution like LIC which effectively represents millions of policy holders and, being a government-owned corporation, is akin to a state.”
