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Strapped for capital amid rising NPAs and falling profitability of public sector banks, the government is looking to raise the ceiling of voting rights for foreign shareholders from 10 per cent to up to 20 per cent in line with foreign direct investment permitted in public sector banks (PSBs). This comes alongside the other plans such as utilising a part of Central bank’s “excess capital” to infuse money into state-owned banks.
While government officials feel that a hike in ceiling of voting rights would encourage foreign portfolio investors to raise their holding, a closer look at the numbers show that if foreign investors increase their holding in 24 listed PSBs to up to 20 per cent then the capital infusion would amount to Rs 45,000 crore (at Friday’s share price).
A government official told The Indian Express that foreign investors have conveyed to the finance ministry that ceiling on voting rights is coming in the way of higher investment in PSBs. “We are looking at increasing the sources of capital. Many foreign investors want to invest but can’t do because of these (voting) caps. We are working in the direction of raising voting rights in banks,” the official said. With limitation on exchequer’s ability to provide funds (given the stringent fiscal deficit target) and weak domestic investor interest in PSBs, the government is looking at ways to diversify fundraising.
On Tuesday, The Indian Express reported that the government is even looking at the proposal to utilise part of central bank’s “excess capital” to infuse money into state-owned banks or create a state-owned ‘bad bank’. The idea was first floated by chief economic advisor Arvind Subramanian in the Economic Survey for 2016-17.
While finance ministry estimates say that PSBs would need Rs 1.80 lakh crore by March 2019 to meet Basel III norms, under its ‘Indradhanush’ plan to reform the banks, the government plans to provide only Rs 70,000 crore as equity and the rest will have to be raised from market or via internal profits. The Centre also allowed banks to bring down government shareholding to up to 52 per cent.
FDI limit in PSBs currently stands at 20 per cent. However, none of the PSBs have foreign holding close to that number. The latest available shareholding of banks shows that as of March 2016, only Bank of Baroda had FPI holding of more than 10 per cent (11.45 per cent). SBI had an FPI holding of 9.25 per cent and Oriental Bank of Commerce had 8.8 per cent. While eight banks have FPI holding of over 5 per cent, United Bank of India and State Bank of Mysore had no FPI holding.
Banking experts say that FPIs may not raise their stake in all banks and may do so in relatively better performing banks. Assuming that the FPIs raise their holding in eight banks where they currently hold over 5 per cent, it would result into capital worth Rs 25,240 crore (as per Friday’s share price).
The FPI holding in PSBs comes in sharp contrast to their holding in private banks. While foreign investors are not even utilising the 20 per cent FDI window, the foreign holding in private sector banks such as HDFC and ICICI bank is close to their FDI limit set at 74 per cent. In 2012, Centre had raised ceiling on voting rights of shareholders to 10 per cent from 1 per cent in the case of nationalised banks, and to 26 per cent from 10 per cent in the case of private sector banks.