Govt to raise FDI cap on banks

The Centre is planning to raise the ceiling on foreign equity holding in public sector banks to enable them to mop up the required capital for meeting higher capital requirements and to fund growth.

To help public sector banks raise Rs 31,300 crore by March 2009, the government is trying to act on a recommendation by a Indian Banks' Association panel to lower the minimum dividend-payment requirement for the public sector banks. Banks now pay a dividend of 20 per cent of net profit or paid-up capital, whichever is higher.

The government is also examining a proposal to allow splitting of shares. "Splitting of shares will enable banks to attract more investors as the price will be affordable. It will also improve liquidity of bank stocks," said a senior IBA official. Stock split, from Rs 10 to Rs 5 or Re 1, is expected to enhance the market price of the shares of public sector banks.

State Bank of India is planning to split shares for its follow on public offer, slated for this financial year. In case of its subsidiaries, SBI has already got the approval of Parliament to split shares from Rs 100 to Rs 10 or any other denomination.

"Increase in FDI/FII holding in equity of public sector banks will increase liquidity and bring out true value of public sector banks," said the chairman a public sector bank.

Citing the example of ICICI Bank, in which foreign holding is above 70 per cent, he said higher foreign holding would result in better price discovery for shares of public sector banks.

According to an internal estimate, ten nationalised banks will have to raise Rs 14,728 crore of equity to meet the additional regulatory capital needs of for complying with minimum 9 per cent capital-to-risk-weighted assets ratio (CRAR) by March 2009. Six banks in the SBI group will have to raise Rs 9,563 crore by way of equity.

Out of the total equity requirement of Rs 31,300 crore by 28 banks, the requirement of banks with government holding close to the floor would be around Rs 5,730 crore, which the government could agreed to infuse.

The finance ministry is also considering lowering the dividend paying norm for public sector banks, many of whom would need more capital by April 2008 to implement Basel II norms on capital adequacy.

Banks not having presence overseas will implement Basel II norms from April 2009.