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Capital lessons from the Indian Bank IPO

Capital lessons from the Indian Bank IPO
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First Published: Mon, Feb 12 2007. 02 10 AM IST
Updated: Mon, Feb 12 2007. 02 10 AM IST
 Little over a decade ago, in 1996, the people of Tamil Nadu were warned against keeping their money in the government-owned Indian Bank. Billboards across the state read, “Your deposit is not safe with Indian Bank”, presumably put up by rivals, including other state-run banks. Billboards appeared even on Rajagi Salai in Chennai, where the bank is headquartered.
Indian Bank executives complained to their owner, the Government of India (GoI). However, they could not retort much as the bank had posted a Rs1,600-crore net loss that had wiped out its entire net worth. To date, this remains the highest-ever net loss made by any Indian bank.
Fast forward to 2007. Today, it’s a different scene at the headquarters of the 100-year-old bank. Its brass spent the entire weekend with investment bankers, working out the allotment process of shares. Its initial public offer (IPO), which closed on Friday, was oversubscribed 32 times. No other public-sector bank has possibly received such an overwhelming response to its first equity issue.
In the recent past, follow-on equity offers of Union Bank of India and Syndicate Bank were subscribed 29 times. Also, among the 19 nationalized banks, Indian Bank’s initial public offer carries the highest price tag—a band of Rs77 to Rs91. If investment banking sources are to be believed, 99% of the subscriptions are at the upper end of the price band.
How has this turnaround happened? Indian Bank has turned around because of a handsome capital infusion by the government, followed up by a unique balance-sheet restructuring. The government has pumped in Rs4,500 crore over the last one decade to keep it floating. Last year, the bank wrote off a huge portion of its capital (Rs3,800 crore) to plug the hole created by accumulated net losses. That brought down its equity base to Rs744 crore. The bank then pared its equity base further to about Rs344 crore by converting Rs400 crore of equity into a preference capital. On a smaller equity base, the earning per shares goes up and the stock becomes more attractive.
Neither Indian Bank nor GoI should be blamed for this financial reengineering. China’s largest lender, Industrial and Commercial Bank of China, which created history last year by floating the world’s largest IPO, and by overtaking many established global banks in market capitalization, had a huge fund infusion by the government to take care of its non-performing assets.
Indian Bank has floated 8.59 crore shares and, following the equity offering, the government stake will come down to 80%. If the shares are listed at the upper end of the price band (normally equity shares on Indian bourses are listed at a premium, barring a few exceptions), Indian Bank’s market capitalization will be over Rs3,900 crore. This means the fund infused to keep the bank alive has not been wasted. The government will be able to recover its money soon if it decides to sell off its stake.
In terms of market capitalization, Indian Bank will be ahead of some listed state-run banks such as Vijaya Bank, Uco Bank, Dena Bank and Bank of Maharashtra ,and will be in the league of Allahabad Bank and Andhra Bank.
Private banks are way ahead of their state-run counterparts when it comes to market capitalization. For instance, ICICI Bank’s market capitalization is around Rs88,000 crore and that of HDFC Bank, Rs33,000 crore. Even the relatively smaller UTI Bank has a market capitalization (Rs15,800 crore) that is comparable with the biggest nationalized bank, Punjab National Bank (PNB), with Rs16,000 crore. Among the nationalized banks, PNB tops the list, followed by Canara Bank (Rs9,775 crore), Bank of India (Rs9,350 crore) and Bank of Baroda (about Rs8,850 crore).
The collective market capitalization of listed nationalized banks is close to Rs86,000 crore. This is more than three times the amount the government has infused to keep the banks alive. After the banking regulator introduced prudent norms to clean banks’ balance-sheets in the mid-1990s, the government pumped in more than Rs23,000 crore in the nationalized banks. It has also written off Rs8769.75 crore to recast the balance-sheets of 13 banks. The banks, on their part, have returned a mere Rs1,850 crore to the government. Here is a huge opportunity for the government to recover its money and even make some by selling its stake in banks directly in the market.
However, to do that, first, it needs to bring down the level of minimum government stake in state-run banks to less than 51%. Will finance minister P. Chidambaram look into this when he announces the Union budget later this month?
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to bankerstrust@livemint.com
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First Published: Mon, Feb 12 2007. 02 10 AM IST