Investors may oppose Uco cap rejig plan

Kolkata-based Uco Bank is planning to reduce its Rs 800 crore equity base by converting a part of it into preference shares. If the bank succeeds in pushing it through, this would probably be the first instance of an equity capital reduction through conversion by a listed entity.

The public sector bank's move, however, could face resistance from retail and institutional investors as they would weigh the prospective returns on equity with the fixed returns from preference shares.

The bank's share price has increased by 148 per cent since March 2007 to Rs 47.95 at close on the BSE on October 1. The bank's shares had touched a 52-week high of Rs 51.90 on September 27.

The bank has submitted a proposal to the government, which owns 75 per cent in the bank, to reduce the equity capital to Rs 500 crore by converting Rs 300 crore into preference shares.

This is being done to boost its earnings per share, the market price of its shares and then go in for a follow-on public issue of equity at better valuations.

Going by the restructuring plans, the government would need to agree to convert Rs 225 crore of its equity holding in the bank into preference shares and retail and institutional investors would have to convert Rs 75 crore of their equity investments.

The bank has indicated that it would pay 7.5 per cent interest on the preference shares. The interest offered is less than the peak deposit rate offered on one-year fixed deposits, which is above 9 per cent.

Keeping the present price trends, the capital revamp plans will test the non-government shareholders' views. Retail investors own 14.97 per cent of the bank's equity shares and institutional investors 7.78 per cent, according to the BSE data.

Uco Bank Chairman S K Goel said some of the shareholders might be looking for regular earnings and, hence, may agree to convert a part of their equity stakes into preference shares of the bank. The bank would have to do some convincing for shareholders to give their nod for such a conversion by offering an attractive fixed return.

"Once the government gives its nod to the capital restructuring plan, the bank will have to convene an extra-ordinary general meeting to get shareholders' consent for converting a part of the equity capital into preference shares," Goel said.