Kolkata: United Bank of India (UBI), the Kolkata-based public sector bank, has postponed its initial public offering (IPO) till such time as the government allows it to restructure its capital base in a way that makes the public issue more attractive to investors.
As on 31 March 2006, the bank’s equity was Rs1,532 crore and it had reserves of Rs296 crore (a total capital of Rs1,828 crore). According to norms laid down by regulator Reserve Bank of India, a maximum of 40% of this, or Rs731.2 crore can be converted into preference capital, or shares that are not taken into account while calculating earnings per share (or EPS).
EPS is a widely accepted investor metric.
That conversion would still leave the bank’s capital base at Rs1,097 crore, a number big enough to dent the bank’s earnings per share, and an IPO, at any price, would find few takers. “We have enough capital to fund our growth. Unless we are allowed to convert more than 40% of our capital base into preferential shares, we are not in a hurry to tap the capital market,” said P.K. Gupta, chairman and managing director, United Bank.
Unlike some other banks that turned around from being unprofitable, United Bank did not use its capital base to write off losses. Indian Bank, for instance, did, and reduced its capital base (and consequently, upped its earnings per share) significantly. Instead, United Bank used its net profit to offset past accumulated losses.
According to Sunanda Lahiri, executive director, United Bank, a lower equity base would mean higher earnings per share (EPS) for the investor as well as a better profit to earnings ratio. “We can command a premium with a lower equity base. We do not wish to be listed at a lower price,” said Lahiri.
In late 2006, UBI had submitted a proposal to RBI, which involved converting Rs1,200 crore of its capital into preference shares. Gupta insisted that the central bank had not rejected this proposal. “The final decision on whether or not to go for an IPO will be based on the bank’s best interests,” he said. He pointed out that the government owned 100% of the bank.
However, sources in RBI said the central bank cannot relax the 40% rule. “The earning on perference capital is much lower than on normal capital on which banks pay dividends.
“Allowing banks to convert 40% of their capital into preference capital already impacts the owner’s income. UBI’s management should have written off the accumulated losses,” he said.