This will apply to three banks - Indian Bank, UCO Banks Vijaya Bank, Finance Minister P Chidambaram said after the Cabinet meeting here.
"The government holding in these three banks will increase and the government's share of dividend will also increase and we will be fully compliant with Basel III guidelines as this can be counted as Tier I capital," he said.
Following the conversion, government holding in Indian Bank would go up to 82.22 per cent from existing 80 per cent, he said.
In case of UCO Bank it would be 77.25 per cent from 69.26 per cent, while Vijaya Bank it would be 71.85 per cent from existing 55.02 per cent, he added.
The Cabinet gave its approval for conversion in Indian Bank, UCO Bank and Vijaya Bank amounting to Rs 400 crore, Rs 1,823 crore and Rs 1,200 crore respectively into equity shares of these banks in favour of government, subject to approval of shareholders and also Securities and Exchange Board of India (SEBI) and other authorities, he said.
Conversion of PNCPS subscribed by the government these banks into equity in the first instance and subsequently in other public sector banks where it has invested in PNCPS, PCPS and IDPIs, would enhance the Tier-1 capital of the state-owned banks thereby making available more funds at their disposal to meet the credit requirement of the productive sectors of economy, he said.
It will also provide impetus to the economy by including the under-banked rural and semi-urban areas, he said.
The conversion is proposed to be done in 2013-14 subject to approval of shareholders and also SEBI and other authorities.
After request of conversion from these banks, RBI's view were sought.
After implementation of Basel-Ill norms, the thrust has been on equity capital in Tier- I capital of banks.
Other instruments without loss absorption capacity do not qualify to be counted for Tier-l capital of banks.
Non-equity instruments such as PNCPS, Perpetual cumulative Preference Shares (PCPS) and Innovative Perpetual Debt Instruments (IPDI) do not qualify to be counted for Tier-l capital of the banks.
The government had, in the past, infused capital by way of these instruments in the public sector banks.