De-list public sector banks
4 min read 13 Nov 2013, 12:40 PM ISTUnless the government promptly takes up governance reforms that are critical for listed firms, it is better to delist them
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The Prime Minister’s economic advisory council reportedly wants the government to cut its stake in state-owned banks from about 58% to the bare minimum of 51%. Apart from the fact that this in practical terms is thoroughly unrealistic, let me make an even more outrageous (and equally unrealistic) suggestion that will nevertheless do good to all concerned: de-list these banks.
I have been a fan of de-listing in cases where listing no longer serves a useful purpose or the listing was done for the wrong reasons. One of the obvious set of candidates is MNCs. In fact, in other forums I have advocated explicitly encouraging MNCs to de-list because most of them do not need to raise capital from markets, and keeping them listed tempts them to commit transfer-pricing violations through devious mechanisms such as royalties for frivolous reasons. State-owned firms in general and banks in particular fall in the same category, although for somewhat different reasons.
The main autonomous motivation for listing is ability to raise capital from external shareholders. An ancillary motivation could be improved governance through greater public scrutiny and disciplining of management behaviour, but this becomes an indispensable necessity once the listing is done. MNCs were forced to list by the socialist Janata Party government. Software companies list not for capital but for improved governance and providing a benchmark for stock options. But the stark necessity of improved governance often fails to get internalised and trouble starts there.
Contrary to statements made by the government from time to time, it is not the intention to improve governance but budgetary constraints that forced listings of state-run banks (or for that matter any government-managed company). If the fiscal deficit is the prime driver of listing, the latter can never serve a useful purpose. And there is now enough evidence that the manner in which public banks are run has regressed so badly that it is time to consider their de-listing. Then the government will be the sole beneficiary and sufferer, instead of the asymmetric state of affairs today.
You may have seen this pattern with some promoter-driven companies. A series of bad results during the time the promoter is increasing his stake, and then magically good results once the process of increasing stake is complete. Or, merging with a private company at inflated valuations. The promoter is rightfully chastised for enriching himself at the cost of minority shareholders. Well, this is what is currently happening with state-owned banks.
Just as with founder-managed companies where boards are a farce, the boards of public sector banks, which were never strong to begin with, have been emasculated by the finance ministry. For shareholders, it is easier to take a call on whether a board is doing its job or not or call them into question, but a distant ministry calling the shots puts paid to the idea. And whether it is the constantly changing process of appointing chief executives of these banks, or a system of five-yearly wage agreements without regard to performance, the government has not covered itself with glory in managing these banks. With the relevant ministry bureaucracy itself undergoing frequent changes and some of them proving to be inordinately capricious, there are just too many moving parts for shareholders to evaluate these entities.
So now we have the sorry plight of the government infusing capital in state-run banks at 50% or 60% of book value, which is clearly detrimental to minority shareholders, but there is no alternative because banks have to conform to capital adequacy requirements and they can ill-afford to tighten the credit strings before elections.
It is important for the government to draw pertinent lessons from the piquant irony—banks were listed so they could draw external capital, but today there is absolutely no appetite for them amongst minority shareholders. Thus, rights issues are precluded and the government alone has to capitalise these banks, increasing its stake in them progressively. We have come a full circle.
The idea of immediate de-listing may be unworkable simply because at 58%, the government is far away from the 90% required for de-listing and it does not have the fiscal resources to buy out minority shareholders at one stroke. But it is creeping de-listing which is in progress. With their governance styles increasingly resembling government departments rather than corporate entities, government-managed banks are steadily losing respect in the public markets, losing valuations as a consequence, enabling the government to increase stakes cheaply.
Let us not get misled by any cyclical upturn, even if one were to take place. Listing is not just about declaring dividends, holding analyst meets or sending certain statements to the stock exchange. It is about being fair to minority shareholders, a far broader concept. If the dominant shareholder cannot or does not wish to facilitate that, the company better be private.
The author has been a senior research analyst on financial services as well as other sectors at various investment banks, and is currently an independent consultant focusing on banks and financial services.
