The government is planning to raise foreign institutional investors? (FIIs) limit in public sector banks (PSBs), keeping in mind the capital requirements under the Third Basel Accord. The move comes in the wake of a rising interest among overseas investors to own PSBs? shares, given the expectations of economic revival, sources in the finance ministry and investment banking told FE.
Sources said the Centre plans to raise FII limit from the current 20% in 25-30% range. The government is also working on making it uniform with private sector banks over a long period because the larger PSBs require a sizeable amount of equity and are grappling with the ownership-cap issues compared with the smaller banks.
Banks may have the option to conduct a public issue to include retail investors, but bringing in retail investors will mean added costs and discounts despite the recent 25-50% correction in share prices of some of the PSBs. Conducting an institutional issue is the best option available, sources said.
?They (the government) have decided on certain things and have already moved a Cabinet note. You may get best value in an offshore issue or a QIP in general, but the foreign cap has limited headroom. So, the government is working on some kind of mechanics for all cap-related issues. They will soon take a call,? said a source.
Foreign investors are betting on an upturn in the economic cycle after the Lok Sabha election, and looking at next best options in the banking space to play the India growth story given the limited headroom in private sector banks and some of the leading state-owned banks.
?For FIIs, to play the India growth story, banking is the safest bet because the sector has exposure to all the large sectors, and is directly related with the infra sector. Offshore investors are gung-ho about state-owned banks and there is a lot of interest because the economy is expected to revive,? said an investment banker with a foreign investment bank.
Investment bankers, who are in constant touch with overseas clients, acknowledge the fact that FIIs concerns over PSBs? profitability and asset-quality issues have abated. Overseas funds view state-owned banks at par in terms of their lending behaviour and expect these banks to move out of the NPA (non-performing assets) cycle together.
?NPAs of SBI and Vijaya Bank or United Bank are similar. Since FIIs are close to hitting their limit in SBI, they prefer to play the next best option because the characteristics are pretty similar. And this time, the situation is not cyclical, the moment economy begins to turn, there will be a huge surge in the share prices,? said another investment banker. FII holding in Bank of Baroda (BoB) was at 18% in the quarter ended September. In case of Punjab National Bank (PNB), FII holding stands at 17.36%. Others like Oriental Bank of Commerce, Union Bank of India, and State Bank of India have FII holding in the range of 11.2-12.7%.
In contrast, FII ownership in some of the smaller-sized banks like Central Bank, Indian Overseas Bank, Vijaya Bank, IDBI Bank, and United Bank of India stands at 0.25-3.1% of the stipulated 20%.
Finance minister Arun Jaitley, in the Budget speech, had estimated banks? equity requirements at Rs 2.4 lakh crore by 2018 to meet Basel-III norms, and that recapitalisation of PSBs was the top priority. Fitch Ratings had estimated banks? total capital requirement at over $200 billion (about Rs 12.28 lakh crore at the current exchange rates), of which state-owned banks will account for 85% share. Except for SBI and BoB, PSBs would find the capital requirements more challenging.