Dilution of government stake in banks. - Views on News from Equitymaster

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Dilution of government stake in banks.

Apr 20, 2000

In a revolutionary move the government has decided to dilute its stake in two leading public sector banks i.e Andhra Bank and Bank of India to 33% of the equity capital. The Reserve Bank of India or the Government was to have a minimum holding of 51% in public sector banks.

While the government has a direct stake in other nationalised banks, it routes its holding in State Bank of India through the Reserve Bank of India.

This follows on the heels of Mr Yashwant Sinha, the finance minister’s recent budget announcement that the government stake in public sector banks would be brought down to 33%. The government had already reduced its stake in two other public sector banks i.e Dena Bank and Bank of Baroda but not below 51%.

As the proposed dilution is to be made by way of increasing equity by way of a public issue and not by way of disinvestment by the RBI or the government, no amendment to the existing act needs to be made but permission from the Finance Ministry has to be obtained on a case to case basis.

This announcement heralds the dilution of government stake in several other public sector banks.

On account of the burgeoning fiscal deficit, the government has been constrained to infuse additional capital into banks.

Most of the public sector banks are sorely in need of additional funds in order to clean their Augean stables which comprise of high non performing assets and sticky loans. There is also an acute need of funds to initiate voluntary retirement schemes, up gradation of technology to compete with private sector banks, training of staff and setting up more branches, expanding existing branches and stepping into new areas of operations.

The present announcement enables banks to tap the public issue route for obtaining these funds.

Though operational flexibility and autonomy is expected to be provided to the board, management control will continue to vest with the government.

The announcement augurs well for behemoths like State Bank of India who are similiarly expected to go public.

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