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Finmin seeks SBI & affiliates merger cost details
April, 25th 2011

The finance ministry has asked the State Bank of India , or SBI, to work out the cost implications of merging the remaining five associate banks with itself before the government approves the proposed rights issue.

The north block wants to ensure that the merger of SBI and its associates does not impose any significant cost on the government.

"We have to look at growing demands of the remaining 20 state-owned banks and if the rights issue has also factored in the cost of acquisition of SBI's associate banks then we need to look at the proposal afresh," said a senior finance ministry official.

The planning commission has been asked to work out a longterm capitalization plan for state-run banks ensuring that their capital needs are met without burdening the exchequer too much.

Finance minister Pranab Mukherjee had said in his speech for 2011-12 budget that the government will infuse 6,000 crore in 2011-12 in state-run banks.

So far, the finance ministry has not taken a decision over SBI's right issue as it involves government meeting nearly 59.4% of the offer because of its holding in the bank. The bank has proposed a 20,000 crore rights issue.

At the time of the last rights offer, the government had paid the banks through bonds instead of cash.

If the government does not subscribe to the rights offer then its stake in the bank will drop. According to the SBI Act, the government stake in the bank cannot fall below 55%, but amendments to the Act (the SBI Amendment Bill) have proposed a lower 51% ceiling.

The government has said its stake in state-run banks will not be allowed to drop below 51%. This has limited the capital raising options of the banks.

"There will be some cost associated with the acquisition. We want them to arrive at some figure before the right issue is approved," the official said.

The SBI had in its initial proposal indicated that it would need around 39,000 crore for the next three financial years for expansion and mergers. A senior SBI official, however, disagreed with government's view of restricting mergers to unlisted banks.

"We hold around 92% stake in State Bank of Mysore and around 75% in Travancore. It should not be such a major issue," he said.

SBI had told a Parliamentary Panel earlier this year that it plans to consolidate the remaining five associate banks with itself in the next 12-18 months.

Consequently, in March 2011 the government had approved the SBI Amendment Bill which gives it the power to effectively manage the affairs of five SBI arms.

The government is of view that SBI should continue the process with unlisted banks first and then move to the listed ones.

"We don't see any reason to fast track the process. So far the merger process havebeen smooth and we are comfortable with the pace," the official said.

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