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

SBI WILL BE GOVT'S FOR A NEAT RS 40,000 CR

SBI, the country's biggest bank, won't go the government cheap. The bank will carry a Rs 35,000 crore to Rs 40,000 crore price tag with it when it joins the government indoors from the RBI fold.

A valuation exercise pegs the acquisition cost for RBI's 59.73% holding in SBI between Rs 35,000 and Rs 40,000 crore. But that doesn't mean the government will need a fresh mint to buy the good old State Bank. It will rather issue special securities to the Reserve Bank to make good the ownership swap.

Going by the stock price, 59% SBI equity is worth about Rs 26,000 crore.

RBI is transferring its equity holding in SBI, which it has been holding since the formation of the bank in 1955, to the government to avoid a conflict of interest. The conflict is that a regulator has shareholding in an entity it regulates.

There's a bit of history to India 's central bank becoming the dominant shareholder in SBI. In the 1950s, the government had told RBI to hold shares in the newly-formed State Bank of India after the nationalisation of the Imperial Bank of India . Reason: the central bank would be better placed to stave off administrative and political pressures to provide credit.

But now, after the proposed share transfer, SBI will become a state-owned bank like many others. Unlike other state-controlled banks, SBI is the only one governed by a separate statute - the SBI Act.

SBI is the country's largest bank in terms of deposits, advances and franchise network.

The share transfer will be so structured to be in tune with the provisions of the Fiscal Budget Responsibility and Budget Management Act (FRBM). The Act, which seeks to promote fiscal prudence, bars the central bank from subscribing to primary issues of government securities and from taking on its books prviately-placed securities.

The transaction will be FRBM and cash neutral, a senior government official said. Considering its fiscal constraints, the government cannot pay cash to RBI for this buyout. Nor that it matters in this bilateral deal. Analysts say that the gains accruing to the central bank on this count could be passed on to the government in the form of higher transfers to the exchequer.

The government, officials said, had been guided by the assessed value method which takes into account all assets at recent market value, besides taking into account value of assets which are not fully reflected in the balance sheet. Going by the valuation, as shown by the market cap of the bank on the stock exchange, could mean a lower realisation for the seller. A committee was assigned the job of determining the pricing.

The market cap of SBI on Tuesday was Rs 42,675 crore. If the assessed value is taken into account, the value of 100% holding could work out to close to Rs 66,000 crore.