Sebi, govt norms may decolour Indradhanush

The Government of India’s plan to help public sector banks (PSB) make a fresh start is well intentioned, but could face road blocks created by its own past rules and regulations. Replenishing lost capital is necessary, but it comes with several constraints, says a report by proxy advisory firm Institutional Investor Advisory Services (IiAS).

According to the Indradhanush scheme, banks need Rs 1.8 lakh crore in the next four years to become well-capitalized, of which the budgetary allocation for support is only Rs 70,000 crore – banks will need to raise the remaining Rs 1.1 lakh crore from the market by FY2019.

Of the promised Rs 70,000 crore, the government had already infused Rs 20,000 crore into PSB by 31 December 2015 – therefore, it will infuse only an incremental Rs 50,000 crore in PSBs till FY2019.

The two major constraints flagged by IiAS are the government’s insistence on maintaining a 50 per cent equity in PSBs from raising capital from the market and the Sebi’s requirement of government reducing its stake in PSBs to 75 per cent or less by August 2017.

The government needs to ensure that its stake does not increase beyond 75 per cent post the capital infusion and if banks raise capital from the market, government’s share cannot get diluted below 50 per cent.

“Regulations require the government to reduce its stake in listed banks to 75 per cent or less by August 2017.This results in seven PSBs being automatically excluded from the incremental Rs 50,000 crore infusion, and another three where the infusion will have to be limited - unless these banks are able to dilute the government shareholding by raising a large amount of capital from the market,” the report said

Therefore, the proposed capital infusion under Indradhanush scheme will directly benefit only 11 of the 21 listed PSBs.

Another opposing constraint comes for the possible dilution of government stake to less than 51 per cent, should banks raise the required Rs 1.1 lakh crore from the market in the next four years.

On March 2, 2016, the market cap of PSBs aggregated Rs 2.85 lakh crore, but the free float market cap was only Rs 99,000 crore. Of this, the SBI group accounts for more than half. “How realistic is it to expect banks to raise this Rs 1.1 lakh crore in equity capital from the market? Even if the public sector banks raised the capital from the market, it would significantly dilute government’s stake (to below 51 per cent in some cases), unless valuations improve substantially,” IiAS asked.