Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Money / Calculators/  Budget 2014: Public sector banks to sell equity to retail
BackBack

Budget 2014: Public sector banks to sell equity to retail

Banks that need to raise capital will have to approach the capital market and issue shares to investors

Abhijit Bhatlekar/Mint Premium
Abhijit Bhatlekar/Mint

In a departure from the past, finance minister Arun Jaitley in the Budget proposed that public sector banks will have to raise capital through sale of shares to retail investors and common citizens of India.

However, the government of India will continue to hold the majority stake in the public sector banks. The way this is likely to work is that banks that need to raise capital will have to approach the capital market and issue shares to investors, though it has not been clearly said that government will not infuse capital at all at a later stage.

In line with the Basel-III norms, banks will have to raise equity capital worth 2.4 trillion by 2018. “This is a positive move. More public shareholding will make them more accountable to the market," said U.R. Bhat, managing director, Dalton Capital Advisors (India) Pvt. Ltd. He added that this will also help increase valuations of the public sector banks over time.

One of the reasons why the valuation of the public sector banks is lower than their private sector peers is that they are dependent on the government for funds. Now that they are being allowed to raise equity capital from the market, there will be pressure to perform.

The finance minister also said that the government will examine the proposal to give more autonomy to the banks and make them more accountable. However, the question is: will the market be able to absorb so much of supply?

Daljeet Kohli, head of research, IndiaNivesh Securities Pvt. Ltd, said that the proposal is in fact negative for the public sector banks and there is not much appetite for these banks, unless the asset quality is improved.

“It may be negative in the short run as people were expecting that the government will come and put in money. But in the long term, it is positive," said Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities Pvt. Ltd, adding that absorption of shares in the market would not be a matter of concern after some cleaning up of the books.

In addition, the government also announced that six new debt recovery tribunals will be set up at Chandigarh, Bangalore, Ernakulum, Dehradun, Siliguri and Hyderabad. This, too, should help banks improve their asset quality.

Apart from capitalization, the finance minister proposed that banks will be allowed to raise long-term funds for lending to the infrastructure sector with minimum regulatory pre-emption such as cash reserve ratio and priority sector lending.

At the end of the day’s trade, the S&P BSE Bankex ended in red with losses of 0.63%.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 11 Jul 2014, 12:24 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App