With govt stake set to touch 89%, UBI strives for equity dilution

With the government approving Rs 810 crore capital infusion in Kolkata-headquartered United Bank of India (UBI), the bank is now faced with the task of reducing a large chunk of government shareholding.

According to data from the BSE, promoters’ shareholding in UBI was 85.91 per cent at the end of June 2016. After the capital infusion, promoters’ shareholding in the bank will touch 89 per cent. UBI will need to bring down promoters’ (the government’s) shareholding in the bank to 75 per cent to comply with the amended Securities Contract (Regulations) Rules by August 2017.

At the recent extraordinary general meeting, Pawan Bajaj, managing director and CEO of United Bank of India, had said: “The bank needs capital before September 30, 2016 so that it can be reflected in the bank’s second quarter results. The bank has got all clearances required for making the allotment barring one from Sebi (Securities and Exchange Board of India). We are conscious of high promoters’ holding in the bank and are working in the direction to bring it within the regulatory threshold limit by due date.”

The bank will examine options such as qualified institutional placement or follow-on public offer to reduce the government stake, said Bajaj.

Apart from UBI, some of the other public-sector banks with government equity above 80 per cent as of June 2016 include Bank of Maharashtra (81.61 per cent), Central Bank of India (80.76 per cent) and Indian Bank (82.10 per cent).

“Not only UBI, most public sector banks would have difficulty in raising external equity due to poor asset quality and low price to book value. Hence, it would be a challenge for them to bring down promoters’ equity,” said Karthik Srinivasan, senior vice-president, ICRA.

  In July this year, the government had said it was releasing Rs 22,915 crore to recapitalise 13 public-sector banks. Of the total allocation of Rs 810 crore for UBI, 75 per cent or Rs 608 crore is to be infused soon after Sebi’s approval, and the remaining 25 per cent by December 2016, depending on UBI’s performance against the benchmark parameters set by the government.

UBI reported an overall capital adequacy ratio (CAR) of 9.89 per cent with Tier-1 ratio of 7.75 per cent as of June 2016. According to Basel-III norms, which will kick in from March 2019, Indian banks need to maintain a minimum capital adequacy ratio of nine per cent, and a capital conservation buffer of 2.5 per cent of the risk weighted assets, which amounts to a minimum CAR of 11.5 per cent. By March 2017, the Reserve Bank of India has prescribed banks to maintain a capital conservation buffer of 1.25 per cent and CAR of 10.25 per cent, against the present norm of 9.625 per cent.