Even as it put off a major review of its foreign direct investment policy, the Union government approved a rights issue by the country’s largest lender State Bank of India (SBI) that will increase its share capital by Rs16,742 crore.
In addition, the cabinet approved a slew of decisions, including its assent to the 11th Plan, which will now be put up before the National Development Council.
The Union cabinet decided late on Thursday evening that the government, as the principal shareholder with a stake of 59.73%, will contribute Rs10,000 crore. But this won’t accrue to SBI in cash.
Instead, the government will issue SBI an equivalent sum of bonds. Under the plan, SBI will eventually be able to redeem the bonds for Rs10,000 crore at the end of a tenure that is yet to be defined.
“We get the shares, and pay for it later,” finance minister P. Chidambaram said on Friday. “The impact is fiscally neutral in the current year. The maturity and term are to be decided later,” he added.
Cabinet Decisions (Graphic)
Details of the bond issue and redemption dates will also be disclosed only once SBI readies its draft red herring prospectus for the rights issue (when the remainder Rs6,742 crore will be raised), he said.
According to Capitaline Databases, the second largest shareholding in SBI is that of foreign institutional investors at 11.98%.
Once the bonds are issued, the government will pay an interest on them, which amounts to Rs790 crore a year. This payment, Chidambaram said, will be more than offset by the taxes and dividends that SBI will pay the government. Accruals to the government are projected at Rs4,800 crore over the next three years. After 2010-11, the government estimates that SBI will give it at least Rs1,892 crore a year in dividend and taxes.
SBI could also use the?bonds to meet its statutory liquidity ratio norms, which mandates that all banks invest a fixed part of their resources in government bonds. Alternatively, the bonds could also be sold by SBI to raise resources.
The government has decided to set up a separate fund, dubbed Securities Redemption Fund, which will be used to redeem the bonds. A part of the dividend and taxes received by the government from SBI will be diverted to the fund.“On an enlarged capital base, SBI will increase its profits, and hence there is no possibility of any shortage in the fund. We have done our calculations,” Chidambaram said.
“This is very positive move for the equity market. All PSU bank stocks will now be re-rated in the market, considering the fact that the government will not curb their growth in fear of stake dilution,” according to Lalit Thakker, director (equity research) at Mumbai’s Angel Securities Ltd. “The credit growth rate is much higher than what internal cash flow can meet. This (move) will help the bank raise money while maintaining the government’s stake in it,” he added.
On the Bombay Stock Exchange, shares of SBI closed with a gain of 1.34% at Rs2,300.30 on Friday, when the bourse’s benchmark Sensex expanded 1.89% to 19,363.19 points.
(Nesil Staney in Mumbai contributed to this story.)