Opinion Chequing out

The Union cabinet gave its approval last week for public-sector banks (PSBs) to raise capital by diluting government shareholding to 52 per cent in a phased manner in order to meet Basel III adequacy norm requirements, which will kick in in March 2019. Of the Rs 2,39,720 crore common equity tier I capital requirement, PSBs will reportedly now be able to raise Rs 1,60,825 crore from the market. This would bring the government’s net outstanding tier I capital infusion requirement down to Rs 44,395 crore. The cabinet’s approval is well timed. With interest rates softening and a rate cut by the RBI thought to be imminent, prices of government securities are going up. PSBs, with their vast holdings of government paper, are slated to book enormous treasury profits. Coupled with the fact that some PSBs are currently trading at a discount to their book values, and have registered respectable earnings growth (22 per cent versus private banks’ 17 per cent) in the quarter ending September, and given that the NPA crisis seems to be bottoming out, there is sure to be significant investor interest and appetite for the stake sale.

But by stopping at just 52 per cent, the government has not been bold enough. Currently, PSBs are hamstrung by a variety of obligations that their private-sector counterparts are exempt from. As the P.J. Nayak Committee to review bank governance points out, by bringing its control below 50 per cent, the government would be levelling the playing field — PSBs would be freed from Central Vigilance Commission oversight, for instance, and constraints on employee compensation. In fact, by diluting its stake up to a point where it is still the dominant, though not majority, shareholder, the government would stand to gain from increased financial returns, while retaining its position of influence.

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But in order to sell stakes below 50 per cent, the Centre would need to go through Parliament, because PSBs are not entities registered under the Companies Act but statutory bodies created by the legislature. It is time for the government to reconsider this arrangement. As recommended by the Nayak report, the government should incorporate PSBs under the Companies Act and repeal the legislation that created them. It’s the right time to do this.