State Bank of India (SBI) is planning an American Depository Receipt issue sometime next year. The management has initiated steps to comply with the US Generally Accepted Accounting Principles (GAAP), which is necessary for any company wishing to access US capital markets. Also, steps are being taken to modify the State Bank of India Act so as to permit the dilution of the Reserve Bank of India's (RBI) holding in SBI to below 51%.
SBI (FY99 Total Income Rs 19.11 bn) is India's largest bank. It runs the world's largest network of 8,900 branches and controls about 22% of India's loans and deposits.
SBI has decided to keep its capital adequacy ratio (CAR) at 12%, much above the statutory requirement of 9%. The bank has recorded an improvement in the advance deposit ratio in the first quarter of the current financial year despite the dull economic conditions in the Indian economy. With the pick up in economic activity, it is likely that the advances will register larger gains. In such a scenario the Bank will have to step up its capital base if it were to maintain its CAR at 12%.
The fallout of the ADR issue will be the dilution of the RBI's holding in SBI to below 51%. Although, RBI is not involved in the management of SBI, it is SBI's promoter. The fact that the RBI is the regulatory authority for the banking industry, and also a promoter of SBI, has invited a lot of criticism pertaining to the conflict of interest that the RBI may face from time to time while deciding on policy issues.
The benefit of an ADR issue vis a vis an Indian issue, despite the higher costs involved, is that such an issue will give the bank access to the largest capital market in the world. Moreover, the funds could be used to step up the Bank's international operations.
The stock is now being rated as a 'BUY' in view of the improving economic situation. It was for a long time rated as a sell because of the slow economy and the likelihood of higher non-performing assets in SBIs books. Some fund managers are also skeptical regarding SBI's handling of the Y2K problem.
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