The Union Cabinet has approved investment of Rs 10,000 crore in State Bank of India (SBI) through a rights issue. The bank would raise more than Rs 16,000 crore through the rights issue. The government, which owns 59.7% in SBI, would pay for the shares by issuing marketable government securities.
The government is counting on the future dividends from the bank to justify the investment. The difference between dividends and the interest cost of the bonds will flow into a securities redemption fund that will pay for the bonds on maturity. The bonds can be classified under the statutory liquidity ratio (SLR) category. The infusion of capital will enhance the capital base of the biggest bank in the country. Further, it will not only boost the valuation but also help meet its capital requirement for the implementation of new norms in capital adequacy and accounting due next fiscal.
The revenue that will come to the government above the interest cost will be kept in a securities redemption fund. It would cost us Rs 790 crore a year. This is a kind of deferred payment that will accrue to SBI every year, finance minister P Chidambaram said. The transaction will be completed within the financial year and a securities redemption fund will be created thereafter.
The governments investment in the issue would help it get dividend and taxes amounting to Rs 1,358 crore from the bank in 2008-09 against an estimated expenditure of Rs 790 crore as interest to be paid for the proposed securities, the statement said. Subsequently, it would receive Rs 1,552 crore and, in 2010-11, the amount would rise to Rs 1,892 crore, it said. SBIs net profit grew 36.04% to Rs 161.14 crore during the second quarter this fiscal against Rs 118.44 crore in the corresponding period of 2006-07.
The government is yet to finalise the number of shares to be subscribed, the coupon or the tenure of the instruments. The modalities of the transaction will be worked out by the government in consultation with the Bank, after factoring in Sebi guidelines, market conditions and other relevant factors, a statement issued after the meeting said. The government holds 59.7% in the bank. A rights issue will allow the bank to raise tier-I capital without diluting government shareholding. The SBI scrip closed at Rs 2,300, up 1.34%, on Friday.
The incremental growth gained on the strength of the increased capital base will have a multiplier effect on the overall performance of SBI, which will boost its valuation of its stock, its position in the industry, ratings in both international and domestic markets, the government said. The bank is also in the process of merging its associate banks with itself.
SBI chairman O P Bhatt has said the bank requires Rs 5,000 crore just for meeting Basel II norms. The bank also needs capital for complying with AS15 accounting standard that mandates disclosure of pension liabilities up to Rs 5,000 crore.
According to government estimates, SBI needs to raise Rs 89,600 crore over five years. Earlier this year, ICICI Bank, the countrys second-largest bank, raised more than Rs 19,000 crore in the countrys biggest share sale while HDFC Bank raised Rs 2,767 crore by selling American depository shares to strengthen its capital base and to support future growth.
The government was not in favour of SBI diluting government equity in a hurry. With a follow-on public issue, its stake would have been diluted from 59.7% to the 55% limit, as prescribed by the SBI Act. The government has also indicated that the capital needs of other public sector banks will be considered too.
The e-filing of tax returns was mandatory last year, which, after initial hiccups, has stabilised.
At present, eight of the 32 agency banks, nominated to collect taxes State Bank of India, Axis Bank, Punjab National Bank, Indian Overseas Bank, Canara Bank, HDFC Bank, IDBI Bank and Union Bank of India already offer the facility. Fifteen other banks are likely to introduce the facility while two have expressed inability to do so.