QIPs by state-owned banks: A push for compliance but little upside for investors

The government is looking to sell stakes in Indian Overseas Bank, Bank of Maharashtra, Central Bank of India, Punjab & Sind Bank, and UCO Bank to comply with the Securities and Exchange Board of India’s rule mandating a minimum 25% public shareholding for all listed companies.

Qualified institutional placements enable publicly traded companies to raise funds to finance key projects or meet capital requirements by issuing fresh equity shares, convertible debentures, or other securities to qualified institutional buyers.

But the five public sector banks have launched QIPs despite being comfortable in terms of mandatory capital requirements.

“With the current capitalisation levels and modest growth outlook for next year, we do not believe (there are) any additional capital requirements from a regulatory perspective for the PSBs," said Karthik Srinivasan, group head–financial sector ratings, Icra Ltd.

He, however, added that “the recent QIP issuances will surely help banks shore up their core capital and also aid in reducing the government shareholding by a few percentage points".

The capital-to-risk assets ratio—a measure of financial stability—of the five state-owned banks is expected to improve by 100-300 basis points following the QIPs. Bank of Maharashtra’s tier-I capital ratio was over 13% as of December, and over 14% for the other four lenders.

Also read | Are PNB investors worried about QIP-led dilution?

Even so, at least one financial research firm has flagged a potential lack of significant returns from investing in state-run banks.

Suresh Ganapathy, managing director and head of financial services at Macquarie Research, said in a note last month that public sector banks had outstanding asset quality and record low provisioning levels (capital kept aside against potential bad debt).

However, he added, Macquarie was apprehensive about investing in public sector bank stocks due to muted return on assets (RoA) despite low credit costs.

“The best ROA that these banks are able to generate is around 1-1.1%, whereas private sector peers are still generating 1.8-2.2%," Ganapathy said in the note, adding that margins for state-run banks had been consistently trending down while costs remained structurally high.

Due to structural rigidities, state-run banks do not enjoy any levers in a rate cut cycle, which could exert further pressure on their margins, Ganapathy said. Public sector banks face a downward bias of 15-20 basis points on their return on assets and 250-300 bps on their return on equity, he added.

“The mandate from the government in the recent past has been that they will not keep infusing capital but that the banks should find the confidence to raise capital from external sources," said Krishnan ASV, institutional research analyst (banking, financial services, and insurance), HDFC Securities.

“That can only happen if these banks have reached a stage where they have had at least some good quarters and can go out and raise money, which has happened in the last 2-3 quarters in terms of recoveries and asset quality. The ROAs are still sub optimal, but at least they are getting closer to that 1% mark," he added.

The first tranche of disinvestments

As Krishnan pointed out, the qualified institutional placements are part of the government’s long-standing strategy to not infuse capital directly into public sector banks and instead allow them to raise capital from the market by leveraging fundamentals and financials that have improved in the previous 3-4 years.

Sebi has granted public sector banks until August 2026 to comply with its minimum 25% public shareholding rule, and Life Insurance Corporation of India until May 2027 to reach a 10% public shareholding.

The government held a 79.6% stake in Bank of Maharashtra, 98.3% in Punjab & Sind Bank, 96.4% in Indian Overseas Bank, 95.4% in UCO Bank, and 93.1% in Central Bank of India as at the end of December. A back of the envelope calculation pegs the government’s excess shareholding in these banks—over the allowed 75%—at around ₹50,000 crore.

Punjab National Bank raised ₹5,000 crore via a QIP in September, and Bank of Maharashtra fetched ₹3,500 crore the following month. This year, Indian Overseas Bank raised ₹1,436 crore via a QIP that ended on 25 March. UCO Bank, Punjab & Sind Bank, and Central Bank are expected to raise up to ₹2,000 crore from their ongoing QIPs.

HDFC Securities’ Krishnan said the QIPs would help the public sector banks strengthen and recapitalize themselves to “some extent so that they become relatively attractive for another round of consolidation".

Also read | Indian QIPs hit a record high in 2024. Will the frenzy continue this year?

The current round of qualified institutional placements is likely the first tranche in a series of QIPs and offers-for-sale involving public sector undertakings so the government can reduce its stake in such companies over the next 2-3 years, as per industry experts.

Financial services secretary M. Nagaraju said at an event in February that the Union finance ministry had over the past six months allowed public sector banks to start the process for QIPs. The banks were expected to collectively raise around ₹5,000 crore in the first tranche, he had said.

While the government has not specified an annual disinvestment target for this financial year, the Union Budget for 2025-26 pegged miscellaneous capital receipts, including disinvestment and asset monetization, at ₹47,000 crore. For FY25, the outlay had been initially pegged at ₹50,000 crore but was later reduced to ₹33,000 crore.

Last month, the Department of Investment and Public Asset Management (DIPAM) invited bids from merchant bankers to assist with stake sales in public sector banks and other listed public financial institutions. Selected merchant bankers would be empanelled for three years, with an option of extending the term for another year, the department said in its request for proposal.

DIPAM manages the government’s annual disinvestment target.

Fundraising via qualified institutional placements reached record levels last year, and are expected to this year as listed Indian companies look to finance capital-intensive projects, Mint reported at the beginning of this year.

Due to the recent correction in India’s equity markets, however, QIPs by public sector undertakings so far this year sunk to seven from 18 in January-March 2024, Emkay Investment Banking said in a report dated 20 March. Initial public offerings (IPOs) by public sector undertakings so far this year dropped to 10 from 15 in the same year-ago period.