The Telegraph
Since 1st March, 1999
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PSU banks root for preference shares

Calcutta, May 4: Several public sector banks have sought the finance ministry’s permission to issue preference shares to meet their capital-enhancement requirements.

High-level banking sources said the issue could be either made open-ended or close-ended, with convertible options.

Currently, banks are permitted to issue only subordinated bonds as part of their Tier II capital, subject to a ceiling of 45 per cent of gross capital.

The proposal aims to reduce public sector banks’ capital base by returning equity to the government and redeeming an equivalent amount of recapitalisation bonds.

Banks, particularly the ones with stronger finances, have been returning their equity capital to boost earnings per share (EPS). They are currently in a position to prune their equity base since their Tier I capital equity plus reserves would be over 10 per cent for 2002-03, sources said.

“This gives them sufficient leeway to resort to financial engineering,” they added. Sources said preference shares scored over other avenues in the present market conditions. The string of public issues during the last financial year were severely under-priced, despite the inherent strength of the public sector banks that came out with these flotations, and their improved earnings.

Preference shares have emerged as a far more attractive option, since they do away with some of the disadvantages of subordinated bonds, the sources said.

The main disadvantage was that the subordinated bonds cease to become capital and turn into normal liabilities if their residual maturity falls below five years.

Several banks that had issued Tier II bonds in 1998 and 1999 are now faced with a situation where such bond issues become part of normal liabilities.

While banks would be in a position to raise funds through the subordinated bond route at rates as low as 6 per cent, it would only be for tenures as long as seven years. “Few investors were prepared to go beyond this period,” the sources added.

Consequently, the option of issuing preference shares has been put forward as an alternative to both the RBI and the finance ministry. The sources said the preference shares would also address some of the concerns of the government, especially those related to voting rights.

Currently voting rights in banking shares are restricted to 10 per cent of the equity holding. Sources said the banks had proposed that the preference shares be used till the government amended the Banking Regulation Act, as promised by finance minister Jaswant Singh.

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