Govt may dilute stake in PSBs

The government may be veering towards paring its shareholding in public sector banks (PSBs) to below 51 per cent, going by the observations of Union Finance Minister Arun Jaitley in his maiden budget speech.

Referring to the requirement to infuse ₹2,40,000 crore as equity by 2018 in PSBs to be in line with Basel III norms, Jaitley said, “To meet this huge capital requirement we need to raise additional resources to fulfil this obligation.

“While preserving the public ownership, the capital of these banks will be raised by increasing the shareholding of the people in a phased manner through the sale of shares largely through retail to common citizens of this country.”

Thus, while the government will continue to have majority shareholding, the citizens will also get “direct shareholding in these banks, which currently they hold indirectly,” the Minister said.

The Minister’s comment that “capital of these banks will be raised by increasing the shareholding of the people” suggests that the government may be game for diluting its stake in public sector banks without losing control on them.

In his speech at the annual FICCI-IBA banking conference in September 2012, the then RBI Governor D Subbarao had said that providing equity capital (additional equity capital requirements of ₹1,40,000-1,50,000 crore under Basel III) to PSBs in the face of fiscal constraints poses significant challenges.

“Would the government be open to reducing its shareholding in PSBs to below 51 per cent? If the government decides to pursue this option, an additional consideration is whether it will amend the statute to protect its majority voting rights,” said Subbarao.

In his budget speech, Jaitley also observed that the government will also examine the proposal to give greater autonomy to the banks while making them accountable.

It may be noted that the RBI’s PJ Nayak Committee that reviewed the governance of boards of banks in India has said that it is desirable for the government to level the playing field for public sector banks in relation to their private sector competitors.

The committee observed that reducing the proposed Bank Investment Company's (the company to which the government’s stake in the PSB is transferred) investment in a bank to less than 50 per cent will free the bank from external vigilance emanating from the Central Vigilance Commission, from the Right to Information Act, and from fovernment constraints on employee compensation.

The trade-off is worth it, as more competitive public sector banks will enhance financial returns to the government with no effective dilution of control, it said.