Public banks seek LIC funding as deadline to reduce govt stake to 75% nears

Most of the banks are planning to go for a qualified institutional placement to reduce the stake, and LIC would be a major subscriber of the issues, said a banker in a PSB

As public sector banks (PSBs) approach the deadline to reduce promoters' stake to 75 per cent, they are reaching out to LIC, which in turn can subscribe to their shares to meet regulatory norms. This is especially true for those banks that have been heavily captitalised by the government in the recent years due to their weak capital base. 

Some of the public sector banks in which government shareholding has exceeded 90 per cent include United Bank of India (96.83 per cent), UCO Bank (92.52 per cent), Allahabad Bank (92.01 per cent) and Corporation Bank (93.50 per cent), to name a few.

The dilution of government stake is essential to meet the 25 per cent public float norms mandated by the Securities and Exchange Board of India (Sebi). The banks are required to bring down government stake to 75 per cent within two years of the breach.

Notably, after the government, LIC is a major shareholder in many public sector banks.

UCO Bank has already written to LIC for close to Rs 1,000 crore equity infusion, according to A K Goel, managing director & CEO, UCO Bank. LIC already has about four per cent stake in the bank. The bank is looking to raise close to Rs 4,500-5,000 crore this financial year.

Allahabad Bank, too, is in talks with LIC for an equity infusion, according to a senior official of the bank. The bank has time till October 2020 to meet the Sebi norms.

Most of the banks are planning to go for a qualified institutional placement (QIP) to reduce the stake, and LIC would be a major subscriber of the issues, said a banker in a PSB. 

One of the reasons that LIC could be a major investor in the banks relates to the fact that most banks might not find corporate investors in the current market situation. Further, earlier, the State Bank of India would also be a subscriber to many QIPs by other PSBs, which is not the case now, said a senior banker.

United Bank of India, too, is planning to approach LIC for equity, Ashok Kumar Pradhan, MD and CEO of United Bank of India confirmed.  

According to a senior official in a PSB, Sebi has already been giving dispensation to banks to extend the timeline to meet the free float norm on a case by case basis.

The options in front of banks to reduce government equity include instruments such as QIP, follow on public offer (FPO) or rights issue, among others. However, for FPO or rights issues, the market conditions might not be favorable now, leaving QIP as the only option.

Also, with the further proposed round of capital infusion of Rs 70,000 crore by the government in public sector banks -- as a measure to boost the economy, the government stake in the banks might go up further, leaving little room for future infusion unless government stake is reduced.