Privatisation: Selling a house bank

The issue of sale price has been largely ignored in post-Budget market euphoria

Privatisation: Selling a house bank
With this deal, Lendingkart strengthens its three-year relationship with the bank receiving funds through NCDs and increases its cumulative exposure to $19 million with this transaction.

By Ashish Kapur & Vineet Agarwal
During the pandemic-induced lockdown when businesses were closed and many lost their livelihoods, a close acquaintance was badly impacted and decided to sell her Mumbai flat. There was a small problem though. Not only had rentals dried up due to migrant exodus, but buyers had also disappeared. The old lady sought help, and besides the price, mentioned a few genuine concerns about the house close to her heart—all the movables were not for sale, the decades-old house-help skilled in tackling periodic utility outages had to be retained, and the buyer offering the best price had to be from the salaried middle-class since, belonging to generations-old services family, she didn’t trust even reputed businessmen.

The government’s bold announcement of selling off a couple of PSU banks to the private sector, though much needed, bears a close resemblance to the aforesaid plot. For starters, choosing which two is a tough task in itself. There are unions to contend with, political opposition to deal with, social objectives to be maintained, not to mention legal and regulatory issues such as how much stake to sell, applicability of open offers et al. Who could these potential buyers be: Domestic corporates, existing NBFCs such as L&T, Tata, Birla, etc, PE funds or global banks eyeing a chunk of Indian market?

Terms of sale would be critical in attracting bidders. Any restrictions on branch rationalisation, employee retention, etc, will act as dampeners, while a strong liability franchise, branch network and dominant market positioning would be the obvious attractions.

Digital vision of bidders together with fintech capabilities adapted towards improving customer experience and building future-ready institutions must be critically evaluated, too.

The issue of sale price has been largely ignored in the post-Budget market euphoria. With the exception of SBI, most PSU banks’ shares quote at a significant discount to their respective book values. Would it be fair to the taxpayer to sell at such low price? Or would buyers be lining up to pay a premium?

So, how can the pool of potential bidders be widened?

—Existing domestic and global institutions loaded with capital can be invited for the bidding framework that’s eventually set up. With successful bidder garnering bulk of the divested shares, the government may even dispose its remainder stake through systematic quarterly open market sales, regulatory leeway permitting.

—Additional categories of buyers including predominantly private financial business groups as envisaged under on-tap universal banking licence guidelines besides reputed names with proven credentials operating in the para-banking segment need to be efficiently tapped.

—It is here that RBI internal working group’s key recommendation of allowing NBFCs with assets of Rs 50,000 crore and track-record of 10 years to convert to banks appears a good way of regulated re-entry of trustworthy corporate houses in the banking system, provided they are able to successfully bid for the chosen banks being privatised.

True, the old acquaintance did manage to sell the dwelling after a patient wait of six months—but only after the state offered stamp duty incentives to entice realty buyers and sweetening of the deal by offering a fully-furnished house except her favourite Tanjore painting—to an enterprising businessman, who, in turn, kept his word by re-employing the caretaker. Could we expect a similar script playing out in the bank disinvestment process?

Kapur is a certified treasury manager and veteran corporate banker; Agarwal is a market analyst with experience in capital markets and project finance

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