The manner in which the government intends to subscribe to the proposed rights issue by State Bank of India (SBI) smacks of everything that is wrong.
First, unlike other investors, it will not pay cash for owning extra shares in India’s largest bank. Instead, it will issue marketable government securities of an equivalent sum to SBI. Further, the government will receive dividend and taxes, which, as it points out in its press release of Friday, will far exceed the interest payments on these bonds over the years. That’s a new paradigm in investment lexicon.
Second, the motivation for this elaborate transaction, made possible only because of misuse of sovereign rights, is largely to mask the fiscal impact of such a payout. It enables the government to keep the transaction off its balance sheet and not report it as a cash outgo.
On both counts, the move should be condemned.