Finance Minister P Chidambaram on Friday said the government intended to buy the Reserve Bank of India's 59.73 per cent stake in the country's largest bank, State Bank of India.
The acquisition of RBI's stake in State Bank of India is being worked out in a manner that the transfer becomes cash neutral for the government. At today's market price of State Bank of India shares, the value of the deal will be about Rs 42,545 crore (Rs 425.45 billion). The transfer is expected immediately after June 2007.
The RBI's financial year is July-June. The transfer deal envisages return of the consideration that will be paid by the government for the State Bank of India stake in the form of dividend from the RBI and this is possible only after June.
Chidambaram, replying to a question in the Lok Sabha, said the government would not dilute its stake in public sector banks below 51 per cent.
An amendment to the law is expected to be passed in the current session of Parliament to allow for lowering the promoter's stake in State Bank of India to 51 per cent from the current stipulation of 55 per cent. This will give more room for State Bank to raise resources through a follow-on public offer of equity shares.
The RBI has been receiving a handsome dividend from State Bank of India. In 2005-06, State Bank of India paid 140 per cent, which translated into dividend income of Rs 440 crore (Rs 4.4 billion) for the RBI.
Chidambaram said its proposed acquisition of the RBI's holding in State Bank of India would not in any way adversely affect the latter's ability to raise capital.
To a question on the government's efforts to acquire the RBI's stake in State Bank of India he said the country's largest bank had a comfortable capital adequacy of 12.63 per cent on September 30 this year, which is well above the minimum regulatory requirement of 9 per cent.
Further, he said the bank had a number of avenues, irrespective of its ownership, to strengthen its capital: raising fresh equity, issue of innovative perpetual debt instruments and various other instruments to shore up its Tier II capital.
"Hence, the transfer of the RBI shareholding in State Bank of India to the government of India will not in any way adversely impact the capital-raising ability of the bank," Chidambaram said.
Pointing out that the RBI's holding in State Bank of India is a legacy issue, Chidambaram said the Narasimhan committee had recommended in 1996 that it was inconsistent with the principles of effective supervision that the regulator was also an owner of a bank and this would require the central bank to divest its holding banks and financial institutions.
Following the committee's report, the RBI had announced its intention to transfer its ownership of shares in State Bank of India, in which it holds over 57 per cent, housing finance companies regulator National Housing Bank (100 per cent) and National Bank for Agriculture and Rural Development (72.50 per cent).
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