INDIA BUSINESS WORLD - JULY 2006
THE MONTH THAT WAS...

GOVT MAY LOWER SBI HOLDING TO 51%

THE government is vetting a proposal from the State Bank of India to raise equity capital. This could mean lowering the stake of its principal shareholder to 51%. RBI holds 59.73% in the bank at present, which will be transferred to the government in this fiscal year.

A dilution of government holding over the next couple of years could be underway considering the bank's need to beef up its capital for business growth and to take care of more stringent regulatory norms.

 The proposal envisages an IPO and a possible offer of shares to the bank's employees. This would prune the shareholding of its dominant shareholder to below 55%, the threshold mandated by legislation.

SBI, according to officials, has told the finance ministry that the holding could be reduced from over 59 % to up to 51 % — the minimum which the government has to hold in all public sector banks. However, unlike other public sector banks, SBI is governed by a different statute —SBI Act 1955 — which stipulates that the holding of the principal shareholder should not fall below 55%. The proposal in its present form would require amendments to this Act.

At the end of March, SBI's capital adequacy ratio was 11.88% compared to 12.45% in '04-05. It has a capital base of Rs 526 crore. The bank has already said it will need an additional Rs 2,500 crore this year alone to fulfil capital requirements. SBI has the leeway to raise funds through bonds, which will constitute tier II capital. For capital adequacy calculations of banks, the core capital or tier I capital constitutes equity capital and free reserves, while tier II capital includes subordinated debt, undisclosed reserves and general loss reserves.