Five PSBs likely to hit market with QIPs in FY25 to comply with Sebi norm

In addition, with the deadline of 1 August to raise public shareholding to 25% fast approaching, the public-sector banks (PSBs) have sought at least two years more from the Securities and Exchange Board of India (Sebi) to enable them to gradually achieve the target, the people said.

Current public shareholding ranges from 1.75-13.54% in these five banks—UCO Bank, Central Bank of India, Punjab & Sind Bank, Bank of Maharashtra, and Indian Overseas Bank.

“The quantum of share sale would be worked out closer to the offers, but it is likely to remain between 5% and 10% of the bank's paid-up equity capital this year, with further sales likely to be staggered over the next two years," said the first person mentioned above, who spoke on the condition of anonymity.

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“The government may also consider diluting a portion of its equity at a later stage. However, such a decision is still being discussed and no roadmap has been drawn up in this regard so far," the first person said, adding that a decision to this effect could be announced in the upcoming Union budget.

Emailed queries sent to spokespersons of the ministry of finance, Sebi, and the five PSBs remained unanswered till press time.

State-run lenders such as Union Bank of India, Indian Bank, Bank of India, Federal Bank, and J&K Bank, among others, have raised capital through QIPs in 2023, resulting in the dilution of the government's stake.

This process is likely to be made more structured this year with larger capital-raising exercises by banks.

However, there are currently no plans for a direct share sale in the market through an offer for sale (OFS) or public offer route in any public sector banks, the first person said.

What’s at stake?

According to data from BSE, the value of government shares to be sold (to reach 75% public shareholding) in the five PSBs is around ₹64,500 crore at current market prices. The value of the shares is highest in Indian Overseas Bank at about ₹26,750 crore, while it is lowest in the case of Bank of Maharashtra at around ₹5,350 crore.

“Banks have asked the finance ministry to request Sebi to give further forbearance to PSBs to comply with its minimum public shareholding norm that is expiring in August. While banks are looking at least at a two-year window, they have cited a three-year extension given to public sector insurer Life Insurance Corporation (LIC) to achieve 10% public shareholding," the first person quoted above said.

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In May, Sebi gave LIC an additional three years, till 16 May 2027, to increase its public shareholding to 10%. This was after the finance ministry gave LIC an exemption from complying with the 25% minimum public shareholding norms until May 2032.

The promoter holding in five PSBs currently stands at 93.08% for the Central Bank, 86.46% for Bank of Maharashtra, 95.39% in UCO Bank, 98.25% for Punjab & Sind Bank and 96.38% in Indian Overseas Bank.

Bringing these down to 75% would mean a large quantum of stake to be offloaded, which is why the banks have sought more time to comply with Sebi norms. The QIP route is being preferred as it has less regulatory hazards and capital can be raised faster.

"It's hard to predict what Sebi's views are going to be. However, since these are government-owned banks, any decision taken will be in line with the overall policy," said Madan Sabnavis, chief economist at Bank of Baroda. "We may even see a mention of the planned divestment in the upcoming budget."

Raise money yourself

The central government has not been providing capital to banks through the Union budget for some time now. It instead wants banks to raise capital from the market directly on the strength of their vastly improved financial position.

Indian banks have reported decent earnings growth during FY24 led by healthy loan growth.

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The total net profit of listed public sector as well as private sector banks in FY24 jumped 39% year-on-year (YoY) to cross ₹3 trillion for the first time.

While the 26 private lenders posted a net profit of ₹1.78 trillion, the 12 PSU banks reported a net profit of ₹1.41 trillion in FY24

Banks could use the capital to further shore up their capital adequacy ratio, improve provisioning, step up lending, and write off bad debts.