New NPA norms and the PNB scam pour cold water on fund-raising plans amid hammered shares
Banks looking to raise funds from the equity market to shore up their capital bases are suddenly facing the prospect of a delay in their fundraising plans. Three banks — Andhra Bank, Indian Bank and Canara Bank — that were planning to float their qualified institutional placement (QIP) issues in the near future are likely to be the most affected by the imposition of new provisioning norms for non-performing assets (NPA) by the Reserve Bank of India, and the outbreak of the Punjab National Bank bank guarantee scam of over Rs 11,300 crore. The two developments have muddied the waters for prospective issuers and cast a shadow on their prospective earnings and intrinsic value. A source in the know of the development said it does not make business sense to come out with a QIP when the stocks of these companies are getting battered. “QIP has a floor price formula by Sebi (Securities and Exchange Board of India).
If the price is falling, the floor price arrived at by the formula will be more than the current market price. So, there is no point in coming out with the issue. Why will people buy when the current market price is less than floor price?” said one of the sources. Bank stocks have seen a dip in value ever since the announcement of the new provisioning norms and then the PNB scam. The PSU Bank Index has declined by 10.4% from the session before the RBI announced the new NPA norms.
A merchant banker who is involved in the issues said it is too early to come to such a conclusion. “Yes, they could get delayed, but as of now, there is no such thing. We are still doing the roadshows, and we will get investor feedback and then figure out. We have not reached a stage where we could take a call. We haven’t come close to the launch of any of these issues,” he said. The banker confirmed that roadshows are on for Canara Bank’s QIP, but have not begun for the other two issues.
The average of the two-week highs and lows of the share price of Andhra Bank, Canara Bank and Indian Bank were Rs 46.88, Rs 313.50 and Rs 338.76 at the close of trade on Monday. Their respective closing prices on Monday were Rs 45.90, Rs 303.85 and Rs 315.80. On February 12, the RBI revised NPA norms, dismantling the earlier regime of multiple restructuring options, by putting in place a clear, but more robust, roadmap for recognition and resolution of NPAs. The RBI also directed banks to share information on all defaulting borrowers with an exposure of over Rs 5 crore with the central bank every Friday. Indian banks are sitting on a stressed assets pool of over Rs 10 lakh crore.
Market participants said the new NPA norms would lead to an acceleration in provisioning, and the fourth-quarter numbers of PSU banks will be impacted by provisioning. The PNB scam in which Rs 11,355 crore was allegedly swindled from the bank through a series of fraudulent transactions has also come as a dampener. In a notification to exchanges last Wednesday, PNB said it had detected some fraudulent and unauthorised transactions at a branch in Mumbai. The transactions benefited a few select account holders and were undertaken with the apparent connivance of bank officials. Based on these transactions, other banks advanced money to these customers abroad.
In a caution notice to other banks, PNB detailed the suspected fraud in one of their branches and asked them to exercise caution in the matter. Two of the QIP contenders, Andhra Bank and Canara Bank, were among the recipients of this letter. QIP is a capital raising tool wherein a listed company can issue equity shares, fully and partly convertible debentures, or any security other than warrants that are convertible into equity shares. But unlike in an initial public offering or a follow-on public offering, only institutions or qualified institutional buyers can participate.
In 2017, 43 companies raised Rs 56,152 crore through QIPs. Banks and financial services companies constituted more than three-fourths of the total amount raised. State Bank of India, Kotak Mahindra Bank, Yes Bank, Federal Bank, DCB Bank and United Bank of India were the other banks that raised money through QIPs in 2017.