The government may opt for warrants issue to infuse capital into the State Bank of India, helping it lock into the current low stock price and leverage its existing resources.
The finance ministry aims to provide Rs 10,000 crore to the bank this year, of which Rs 2,900 crore could be given immediately from the resources set aside in the budget.
"Differential voting rights is out of question and rights issue will require immediate allotment of funds which the government is not in a position to allocate," a finance ministry official told ET, indicating preference for warrants.
SBI has demanded urgent decision on its plan to raise capital after its tier-I capital dropped to 7.6%, below the mandatory 8%.
The SBI had earlier indicated it will require Rs 20,000 crore over the next two fiscal years and proposed a rights issue that would have required the government to infuse about Rs 12,000 crore if it needed to retain its stake in the bank at 59%. The cash-strapped government has found it difficult to spare such funds.
Warrants are derivatives in the nature of options that give the buyer the right to purchase shares in a company at a pre-decided price within a certain period, 18 months in the case of listed companies in India.
According to Sebi rules, shares have to be priced at higher of the average of the weekly high and low of the closing prices during the six months preceding the issue date or the same average during the two weeks preceding the issue date.
SBI's share price has been in the range of Rs 1,715 to Rs 2,675 in the last six months.
Only 25% of the price at which underlying shares are priced in the warrants issue has to be paid, allowing the buyer to benefit from a possible rise in share price.
The warrant proceeds are considered as equity as they are adjusted against the final price if the buy option is exercised.
"If the acquisition price is finalised by the government now, it will allow the government to infuse around 30% now and the rest later at a lower cost if the share price of SBI rises," said Jagannadham Thunuguntla, strategist & head of research at SMC Global Securities.
Issuing warrants will allow the government to lock into the lower prices, but the actual capital infusion is likely to happen over the next 18 months
Depending upon the success with SBI, the same model may be followed in case of other state-run banks.
The Planning Commission has already approved the Rs 14,000-crore demand of the finance ministry for capital infusion in 21 state-run banks. The government is expected to finalise the amount for each bank by the end of this month.
"We have already approved Rs 2,900 crore for SBI from last budget. The rest will be given during this financial year to fully capitalize SBI," the official said.
Another finance ministry official confirmed that the government is also exploring the option of a World Bank loan but negotiations have not started yet.
"We were allocated $3.2 billion last year, but had taken only $ 2billion. So, there is a scope but it's too early to say," he said.
The government expects the capital adequacy concern of SBI to be mitigated this quarter because of the extra provisioning by the bank in the earlier two quarters.
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