THE government will buy out RBIâ€™s 59.7% stake in the countryâ€™s largest
bank, State Bank of India (SBI), in a cashless transaction with the
Union Cabinet approving the transfer of equity on Thursday. The
acquisition of the controlling stake in the bank by the government will
be funded through issue of securities. A provision of Rs 40,000 crore
will be made in the upcoming Budget for the transaction that is viewed
as one the largest of its kind for the government.
RBI is transferring the stake in SBI it held for over 50 years to the government to avoid a conflict of interest arising from a regulatorâ€™s equity exposure to a regulated entity. Briefing reporters after the Cabinet meeting, finance minister P Chidambaram said, â€œIt will be a bookentry transaction as whatever I pay RBI, I will get back.â€
â€œBefore the end of RBIâ€™s financial year on June 30, the government will transfer an amount equal to the value of the 31.4 crore equity shares to the books of RBI,â€ sources close to the development said. However, by July end when RBI readies its balance sheet, the surplus amount due to the government will be transferred back to the books of the government. SBI shares closed at Rs 1,203.10 on the BSE. The final valuation will depend on the quoted market price for the SBI stock and will be in accordance with Sebi guidelines.
The transfer of equity, even though it comes at a high price, is possible given the fiscal space available to the government. The plan envisages the fisc accommodating a part of the bill, with the rest to be met partly from borrowing and partly by availing the overdraft facility. The combination of these could lower the burden on the government balance sheet arising from undertaking such a large-scale transaction.
The government will have to calibrate its borrowing during the early part of the coming fiscal to take into account the payout for the stake transfer. Even if the government borrows at 7% interest rate, the annual outgo on interest would work out to Rs 2,030 crore. For the duration in July, the government will have to pay an interest on the borrowing it undertakes in the month.
Officials have said the government will not breach the limits set under the fiscal responsibility and budget management legislation for borrowings thanks to robust tax collections this year.
Assuming that the government transfers Rs 40,000 crore to RBI, interest on the securities that will be issued to part-fund the acquisition could be the cash outgo for the government. However, the same amount will be invested by RBI in overseas gilts. The earning on such an investment will be remitted to the government. So, in effect, the government will have to bear the small differential in interest rates, sources explained.
Government officials said a specific amendment to the SBI amendment Bill for the transfer of stake will need to be introduced. Already, the standing committee is examining other provisions under the SBI amendment Bill. Further, once the stake is transferred to the government, it will examine any proposal allowing the bank to dilute its stakeholding till 51% for raising capital to meet its expansion needs. â€œThe bank could go ahead and dilute government holding up to 55% or even 51%,â€ a senior government official said.
Once the SBI amendment Bill is through, the minimum statutory holding in SBI will be reduced from 55% to 51%. The only complication in the financial engineering is the way the transaction will be accounted for in the Budget. Sources said the outgo from the government will be accounted for as capital expenditure and the receipt from RBI will be treated as capital receipt in order to keep it revenue neutral.
The Cabinet also approved the transfer of RBI stake in National Housing Bank (NHB) and Nabard which is expected to be completed by June 2008. The government has said the transfer of stake is being done on the basis of the recommendation of the Narasimham Committee that said it would be appropriate for RBI not to own the institutions it regulates.
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