New Delhi: Five state-owned banks with public shareholding well below the minimum level mandated by the markets regulator risk missing an extended deadline to meet that requirement, potentially slowing the central government’s efforts to dilute its stakes in them.
The Securities and Exchange Board of India recently pushed its deadline for these lenders–UCO Bank, Central Bank of India, Punjab and Sind Bank, Bank of Maharashtra, and Indian Overseas Bank–to increase their public shareholding by two years, till 31 July 2026.
Now it appears that these five banks will need at least three more years to increase their public shareholding above the mandated 75%, two persons said.
“Four of the five banks have over 90% government shareholding and would require at least three years to bring it below 75%. Considering the valuation of the banks, increasing public shareholding can only be done step by step, and not all at once,” said one of them, a senior government official.
“Qualified institutional placements (QIPs) are also under consideration to reduce the government’s stake in these banks. Depending on the market conditions, the first round of QIPs could be carried out in the second half of FY25.”
The quantum of share sales in the QIPs will be determined closer to the offers, though it will likely remain between 5% and 10% of a bank’s paid-up equity capital this year, the second person mentioned above said. “Further share sales will be staggered over FY26 and early part of FY27.”
Both of them spoke on condition of anonymity.
Current public shareholding in the five public sector banks ranges from 1.75% to 13.54%.
Mint reported on 25 June that these five banks would hit the stock market with QIPs in 2024-25 to comply with Sebi’s mandate.
A QIP is a capital-raising tool for a listed company to issue equity shares, fully and partly convertible debentures, or any security (other than warrants) that is convertible to equity shares.
Apart from a preferential allotment of stock, a QIP is the only other speedy method of private placement of equity for a listed company to issue shares or convertible securities to a select group of investors.
But unlike in an initial public offer (IPO) or a follow-on public offer (FPO), only institutions or qualified institutional buyers (QIBs) can participate in a QIP issuance.
State-run lenders such as Union Bank of India, Indian Bank, Bank of India, Federal Bank, and J&K Bank raised capital through QIPs in 2023, effectively diluting the government’s stake in them.
This process will be more structured this year with bigger capital-raising exercises by banks, said the official mentioned above.
Spokespersons of the ministry of finance and the five banks did not reply to emailed queries.
The central government wants banks to raise capital from the stock markets based on the strength of their vastly improved financial position, reducing their reliance on it.
With the government not providing capital to state-run banks through the Union budget in recent years, the lenders have to rely on the markets to shore up their capital adequacy ratio, improve provisioning, increase lending, and write off bad debts.
But this will have to be done gradually since the market will not be ready to absorb such large stocks at once, said experts.
“Practically speaking, big organisations like big public sector banks can’t bring down 10-15% equity overnight. You also have to understand the market’s appetite before going for such a share sale process,” said Madan Sabnavis, chief economist at Bank of Baroda.
“The government will take a call about the absorption capacity of the market. Also, it can’t be a blanket rule across all banks, since each bank has a different share price, and the quantum of share sale will vary across banks,” he added.
The total value of the government shares that needs to be sold for the five banks to reach 75% public shareholding is ₹60,000 crore to ₹65,000 crore at current market prices.
The total net profit of listed public and private sector banks jumped 39% year-on-year to cross ₹3 trillion for the first time in 2023-24. While the 26 private lenders posted a net profit of ₹1.78 trillion, the 12 public sector banks reported a net profit of ₹1.41 trillion in FY24.
Apart from a phased dilution of its equity in public sector banks, the government is expected to take a similar route to raise public shareholding in state-owned Life Insurance Corporation.
Sebi has granted LIC a three-year extension to achieve a 10% public shareholding by May 16, 2027. As of March 31, public shareholding in LIC was 3.5%.
