Close on the heels of the success of ICICI Bank Ltd’s follow-on equity offer, the Government of India, majority owner of the State Bank of India (SBI), is changing its share sale strategy for the country’s largest commercial bank.
Instead of making a follow-on equity offer as originally envisaged, the government is toying with the idea of going for a combination of a rights issue and sale of preference shares in the first stage, a move that could actually raise its stake in the bank in the short-term. In the second stage, the government will sharply dilute its stake through a share sale in the domestic and international markets.
The government now has a 59.73% stake in SBI. Technically, the Reserve Bank of India still holds this stake, but it will be formally sold to the government on 29 June. An amendment to the Act that governs SBI is likely to be cleared by Parliament during the monsoon session, allowing for a reduction in the government’s stake to 51%. The amendment will also clear the way for a sale of preference shares.
“A few percentage points dilution in the government stake will get the bank a few thousand crore. But it (the bank) needs more (money). So, we are looking at the prospects of a rights issue and even preference shares for the time being. But very soon, the bank will go for a public issue both in the domestic market as well as overseas,” said a person close to the development in the finance ministry who did not wish to be identified.
With an asset base of Rs5.67 trillion, SBI accounts for around a fifth of India’s banking industry.
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SBI chairman O.P. Bhatt said the bank is exploring all options. “Once we decide on the course of action, raising money is not an issue. There is a huge appetite for SBI paper,” he added. SBI has not yet appointed any investment banker to handle the issue, but the investment banking community has been making presentations to SBI eyeing the mandate for managing its float.
“We would not advise SBI to sell its shares cheap. Its global depository receipts (GDRs) are being traded at over 15% premium to the domestic price. Also, foreign institutional investors (FIIs) are paying over 20% premium to the market price when they buy and sell SBI shares among themselves. The government must decide on its dilution strategy first,” said an investment banker whose firm is pitching to manage SBI’s public issue, on condition of anonymity.
Foreign stake in SBI is capped at 20%, unlike in private banks where Indian laws allow it to be as high as 74%. Since this limit has been reached, FIIs buy and sell the stock at a special window of the National Stock Exchange without breaching the overall limit. The SBI stock on Friday closed at Rs1,455.80, close to its yearly high of Rs1,479. At this price, SBI’s market capitalization is Rs76,619 crore against ICICI Bank’s Rs85,775 crore. The gap between the two will widen after the listing of ICICI Bank’s new shares.
Writing to shareholders in the bank’s annual report, SBI’s chairman said: “Over Rs15,000 crore of capital may be required in the coming year to meet the growing (credit) requirements, which can be raised by a combination of equity and debt capital.” SBI recently raised Rs2,533 crore as tier-II capital. It also raised $225 million worth of hybrid capital overseas. Following this, Bhatt said, SBI’s capital adequacy ratio (CAR) continues to be more than 12% despite high credit growth. Indian laws mandate a minimum CAR of 9% for banks. This means that for every Rs100 that banks lend out, they need to have a capital of Rs9. However, the capital requirements will go up following the implementation of international risk weight norms.
“Debt is always expensive compared with equity. One reason why ICICI Bank raises equity capital often is to source relatively cheaper funds to support its assets growth. SBI too needs to follow this route,” said a banking analyst with a foreign bank who did not wish to be identified. SBI’s loan assets have been growing at around 25% with a special focus on rural India. Cheap resources will help it grow its balance sheet and improve its profitability.
In December 1993, SBI made an initial public offering (IPO) at a premium of Rs90 (on shares with a face value of Rs10). Subsequently, in October 1996, it made a GDR issue, the first by any Indian bank.
Preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. However, they get a specific dividend that is paid before any dividend is paid to the other stakeholders. And unlike common stock, preference shares pay a fixed dividend that does not fluctuate. The main benefit in owning preference shares is that preferred stock investors have a greater claim on the company’s assets than common stockholders. A rights issue offers a specified number of shares to the existing shareholders at a specified price within a specified time-frame. Normally, one shareholder can renunciate rights to subscribe to this issue in favour of another shareholder.
Apart from SBI, HDFC Bank and UTI Bank, both in the private sector, and public sector Syndicate Bank are planning follow-on offers.
Also, public sector Central Bank of India is chalking out plans for its IPO.