SBI differential voting rights shares on anvil

Since the subject is sensitive,government officials were unwilling to go on record. But explaining the rationale,one of them said it made no sense to raise about R40,000 crore from the disinvestment of public sector companies in 2011-12 as projected in the Budget only to plough back about R10,000 crore or so to keep the government investment in the bank at above 51%.

The way a roadblock has built up in the current dispensation is as follows. When a bank like SBI lends,it has to simultaneously ensure there is sufficient capital as a base to keep the lending solvent. This ratio,known as the capital adequacy ratio,is 9% for Indian banks. The capital is,in turn,composed of two types,equity and some per cent of debt,known broadly as Tier I and II. Of the Tier-I capital,the percentage held by the government is at least 51% of the total equity capital.

The problem occurs as it will in 2011-12,when bank lending is expected to grow by at least 20%. The capital base then has to grow and that means the government in turn has to pump in more equity to keep the percentage at 51%.

This will mean taking away resources from the government to keep up a commitment to keep the public sector nature of banks intact,when the resources can be far better deployed elsewhere. The issue has become urgent as lending from banks needs to rise fast and at the same time,the government is determined not to breach its borrowing target.

In fiscal 2010-11,it was able to make the impossible happen by borrowing from the World Bank about R10,000 crore to meet some of the R22,000 crore it added as capital into some of the public sector banks.

Shares with differential voting rights are usually those which carry more votes than ordinary shares. Allowed in India under the Companies Act,1956,they are primarily used to thwart hostile takeovers since,for all practical purposes,they decouple economic interest and voting rights.

Section 86 of the Act permits the issue of equity shares with DVRs,subject to certain conditions. But with the issue of DVRs,the other or ordinary shares have to be sweetened with higher dividend. Hence,the SBI management will have to balance the benefit of DVRs with the impact of the higher dividend on the bottom line,as it also has to grapple with higher provisioning norms.

On the issue of Sebi listing rules,a government official said while it made sense to effectively block the DVR route as there was a possibility of its misuse,the needs of the public sector banks makes for a very good case to relax the rule.

Shares with differential voting rights are usually those which carry more votes than ordinary shares. Allowed in India under the Companies Act,1956,they are primarily used to thwart hostile takeovers since,for all practical purposes,they decouple economic interest and voting rights.

Section 86 of the Act permits the issue of equity shares with DVRs,subject to certain conditions. But with the issue of DVRs,the other or ordinary shares have to be sweetened with higher dividend. Hence,the SBI management will have to balance the benefit of DVRs with the impact of the higher dividend on the bottomline,as it also has to grapple with higher provisioning norms.

On the issue of Sebi listing rules,a government official said while it made sense to effectively block the DVR route as there was a possibility of its misuse,the needs of the public sector banks makes for a very good case to relax the rule.