Most bank, whether state owned or private, have sufficient reserves and access to the capital needed for which, a number of methods, including rights issue, can be employed

Last week, finance minister P Chidamabaram, after a review meeting with the public sector banks said that the Indian government may have to seriously think of ways and means to increase capital needs of state owned banks. Broadly, he felt this could be achieved by issuing shares to the employees, invite greater participation by pension and insurance funds and/ or by issuing rights shares to minority shareholders. We would know in due course what the state owned banks might do, possibly, after the elections are over.

In the last couple of months, we covered the issue of many corporations, who had advertised full details of the third quarter results, for the period ending 31 December 2013.  We go into this information, once again, but this time, we shall restrict ourselves to review the situation of banks, both private and state owned, for a study. The figures speak for themselves:

                                                                                                                                                        (Rs in lakh)

From the above basic financial data it will be observed most of these banks have sufficient reserves on hand. So, whether they are state owned or private, they have access to the capital needed, and for which, a number of methods can be employed, of which the finance minister already hinted the possibility of rights shares being issued. Well, that's one means of getting the additional capital required.

What about the other, such as the bonus issue, which many of these banks many not have resorted to in the last few years?  Hypothetically, let us assume the paid up capital of a state owned bank is Rs100 lakh, of which is 80% government and 20% in minority shareholding by public investors. Let us also suppose the face value is Rs10 and the current market price at Rs70.

The first option could be, for the Board, to give a 1:1 bonus, with the government waiving their right to accept the same. The current market price (CMP) becomes Rs35.  At this point of time, the government may divest by sale part of its holding in the market, or issues this lot to employees or even offer a suitable percentage to pension funds, UTI and other institutions. Later on, when the market stabilizes, the Board can go in for a rights issue.           

The second option could be for the Board to issue Rights on a 1:1 basis to minority shareholders only, at the current market price, with the government not taking this offer, but letting it be diverted to employees, pension funds, LIC, housing boards, UTI etc. Here again, once this is settled, the Board may consider capitalization by a bonus issue.

The exact modus operandi can be worked out by a Chartered Accountant, tailor made for each institution.  However, the Government's aim should be to reduce its holdings to not more than 26% of the capital employed.

Finally, all the state owned banks must be run by professionals, by truly qualified bankers, and not to be treated as the resting post for retiring government officials, politicians and their nominees.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)