The government is planning to change the way it controls state-run banks, so they can raise lots of additional capital without the government losing control over them. The finance ministry believes one common holding company to unite 21 state-run banks could eliminate ad hoc, last-minute infusion of resources that has been the practice so far.
A holding company structure allows for innovation in capital infusion, the reason why nearly 85% of US banks have such a structure. A holding company structure will allow the parent firm to raise debt at home and even abroad, a finance ministry official told ET.
The company may even be allowed to list later, which will enable it to raise equity as well as debt for the banks. But as banks raise new capital, the government's share is bound to go down.
To maintain control, the government is considering innovations such as differential voting rights, golden shares or shares with zero voting rights to preserve the public sector nature of these banks.
Finance Minister Pranab Mukherjee is believed to be not too enthusiastic about the golden shares mechanism because it will enable any amount of dilution of state equity, leaving only veto powers with the government.
The implicit sovereign guarantee will help the holding company raise debt funds at finer rates. "If need be, we can even consider an explicit sovereign guarantee," the official said, requesting anonymity.
The holding company could infuse funds into the bank where it will own majority through multiple routes such as subscribing to the bank's equity or buying the debt issued by it.
The structure may also allow the holding company to raise funds for a specific bank. For example, if a state-run bank needs Rs 3,000 crore, the holding company will raise money from investors, linking the returns on them to the performance of that bank, explained the finance ministry official.
"It is an interesting move as the government will be able to raise debt through the holding company without putting any pressure on its existing fiscal burden," said Amit Jain, corporate restructuring expert and partner with BMR Advisors.
The government will transfer all its shares in state-run banks to this holding company, which will resemble an investment special purpose vehicle for public sector banks.
The government has been finding it difficult to capitalise state-run banks due to the constrained fiscal situation and has been resorting to ad hoc allocation of funds among many claimants.
In the current fiscal, the budget had provided Rs 6,000 crore for infusion into banks, but that will fall short of needs. The State Bank of India alone needs a massive dose of cash to maintain its tier-I capital adequacy ratio at 8% by the year-end.
The finance ministry has written to the Planning Commission seeking Rs 14,000 crore this fiscal for bank capitalisation.
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