The Telegraph
Since 1st March, 1999
Email This Page
Bank equity buyback gets a big push

New Delhi, Oct. 6: A new formula is in the works that may allow public sector banks to buy back their equity from the government at a premium which is less than the market price.

The banking division of the finance ministry, which has witnessed a change in the top brass with . S. Sisodia taking over as secretary-banking, is already working on the proposal.

With the disinvestment programme in doldrums following the recent Supreme Court ruling, the government is now exploring the bank equity buyback alternative to bridge its burgeoning fiscal deficit.

An earlier move to initiate the bank stock buyback programme got scuttled with the finance ministry insisting on a hefty premium while the banks demanded that the buyback should be at par value.

Now, the idea is that banks pay a small premia on capital return but to peg it at rates far lower than what these stakes would fetch in the market.

Ministry officials pointed out that one method could be deep discount on prevailing market prices. However, a section feels it would be best to delink the entire issue from the working of the market.

“We would like to delink the issue from the bull run on banking stock. The market goes up and down. But the premia can be decided by a host of other factors which could include the fundamentals of the bank — its asset base,” ministry officials said.

Another method being considered is future income discounting. This method calculates the premium by working out the difference between expected dividend payment by banks and the interest income on the bonds which were issued to capitalise these banks run out.

The banks had earlier demanded that equity return should be at par since much of the recapitalisation done earlier was not through cash infusion but through placement of recapitalisation bonds with the banks with a 10 per cent coupon. When the capital is bought back, the government would also have to extinguish its bonds.

However, the government’s point has been that it is the owner of equity stake in banks and if it auctioned the stake in the market it could earn a premium. So the banks which need to extinguish some part of their capital should also pay a premia.

PSU banks like Punjab National Bank, Oriental Bank of Commerce, Syndicate Bank and Bank of Baroda have been seeking capital buyback partly to improve their book values and earnings per share which eventually reflects their market value and partly because they have excess tier-I capital on their books.

While the prescribed ratio of capital to risk weighted assets is 9 per cent, most banks have between 11-12. Besides, banks now pay high dividends on capital employed and low interest on tier-II capital which comprises sovereign bonds.

Email This Page