Govt may gain Rs 1050 cr from PNB issue

The government has worked out a novel mechanism to earn a premium on its holdings in public sector banks.

The finance ministry today cleared the second public issue of Delhi-based Punjab National Bank (PNB), with an explicit understanding that post-issue PNB would return part of the government equity to the Centre at the premium it earns from the market.

The law does not permit the government to offload its stake in public setor banks directly in the market which it can do for the manufacturing outfits in the public sector. Technically, it also cannot ask banks to return equity at a premium.

The new mechanism will skirt all legal hurdles and enable the government to earn a premium on its holdings in profit making banks which have been doing well on the bourses.

Going by the plan, PNB will issue eight crore equity shares in the market to expand its current equity base of Rs 265 crore.

Earlier, the plan was to issue five crore equity to the public which would have brought down marginally the government stake from the present level of 80 per cent.

After issuing eight crore shares to the market, PNB will return three crore shares to the government along with the premium it fetches from the market. The PNB scrip today closed at 402.60 on the Bombay Stock Exchange.

The pricing of the issue will be decided on through the book building process once Securities and Exchange Board of India gives the go-ahead to the issue.

Analysts expect the PNB issue to be priced at around Rs 350. If that happens, the government will stand to gain Rs 1050 crore from the deal. "We expect the money to come from PNB before the end of the fiscal year," said a government source.

PNB held a meeting with a clutch of investment bankers this evening to finalise the details of the public issue.

Industry observers expect the government to follow the same route for other profit making public sector banks which have been doing well on bourses like Oriental Bank of Commerce and Bank of Baroda.

Last year, when some of the listed public sector banks wanted to return part of the government's equity to prop up the earnings per share (arrived at dividing the net profit by the number of shares) and book value (net worth divided by the number of shares) and improve their valuations on the bourses, the government had first asked for a premium.

But banks resisted the move citing the "netting off" formula. Traditionally, when a bank wants to return part of the government's capital, two things are taken into account: the dividend pay-out by the bank on the part of the capital it wants to return and the interest outgo from the government on the bonds in which the capital was invested.

If the dividend payout is less than the government's interest cost, then the bank is required to make good the gap while returning the capital.

Senior bankers said there is nothing wrong in the bilateral arrangement between PNB and the goverment and this is the best to way to skirt the legal hurdles.