Govt to provide capital to PSU banks

Source :Sidhartha, TNN | Sep 30, 2011, 01.26AM IST


NEW DELHI: With the government ruling out stake dilution below 51%, the finance ministry is assessing the capital requirement of state-run lenders over the next decade, raising the possibility of using innovative fund raising tools such as differential voting right shares (DVRS) and golden shares, besides dusting out old files on the holding company structure.

Bankers and government officials told TOI that the department of financial services has set up a committee under joint secretary Alok Nigam and bank chiefs, which has been tasked to look into the issue. The panel is learnt to have met for the second time on Tuesday and its recommendations are expected to be finalized over the next few months.

Banks were also asked to submit their capital requirements to fund their growth plans, which they have done. Sources said one of the key areas that the committee would look at is ensuring sufficient availability of capital without putting extra strain on the government balance sheet in view of the rising fiscal deficit levels.

As a result, the proposals on golden shares and DVRS are back on the table. A golden share will give the government power to exercise veto power even if it holds one share. Similarly, a public sector bank can issue shares where the voting right is capped at, say, 10%, something that has already been tried by large conglomerates such as the Tatas and the AV Birla group. In case of companies, which are already allowed to issue these shares, the Companies Act stipulates that DVR shares should not exceed 25% of the share capital. These shares are also entitled to receive dividends and bonus.

In 2007, State Bank of India had for the first time proposed issuing DVRS but the move did not materialize as the government did not take a view. Another proposal which did the rounds earlier - the one for setting up a holding company - too is being discussed in banking circles. Under this model, a new company would be set up, which will hold stake on behalf of the government in public sector banks. The move will help the government rein in its spending as the holding company will do the fund-raising.

While the government has already provided over Rs 30,000 crore to public sector banks over the last three years, faster economic growth is putting pressure on banks to provide more loans to companies and individuals. With the law barring government from lowering its stake below 51%, the lenders find it tough to raise funds through issue of fresh shares as it would result in dilution of the Centre's shareholding. Over the last few years, new tools such as issue of preference shares, perpetual equity and rights issue have been used to provide equity to public sector banks.