Govt Shareholding Cut by 5 PSU Banks for MPS Norms

The Indian government is accelerating its efforts to bring public sector banks (PSBs) under the purview of SEBI’s minimum public shareholding (MPS) norms. This regulatory requirement mandates that all listed companies maintain at least 25% public shareholding. While four PSBs – State Bank of India, Punjab National Bank, Bank of Baroda, and Bank of India – achieved compliance by March 2023, five others are facing a tight deadline – August 2024 – to meet the MPS threshold.

The Five PSBs in Focus

Financial Services Secretary Vivek Joshi revealed that Bank of Maharashtra (86.46%), Indian Overseas Bank (IOB) (96.38%), UCO Bank (95.39%), Central Bank of India (93.08%), and Punjab & Sind Bank (98.25%) currently have the highest government holding. These banks are actively formulating strategies to reduce government ownership and increase public participation by a significant margin within the next few months.

Exploring Options for Stake Dilution

The PSBs have a limited window to achieve a substantial reduction in government holding. Here’s a breakdown of potential methods:

• Follow-on Public Offerings (FPOs): Issuing new shares to the public through an FPO is a common approach for increasing public float. For instance, if Bank of Maharashtra decides to offload 10% of its government stake through an FPO, it would raise fresh capital while diluting government ownership to 76.46%. This strategy can be replicated by other PSBs depending on the targeted reduction in government holding.
• Qualified Institutional Placements (QIPs): Selling shares to institutional investors like mutual funds and foreign institutional investors (FIIs) through QIPs is another viable option. Let’s say UCO Bank opts for a QIP to reduce government holding by 5%. This would bring in a larger pool of investors without significantly diluting the retail investor base, taking the government stake down to 90.39%.

The most suitable method for each bank will depend on factors like market conditions, the bank’s financial health , the desired level of public participation, and investor appetite.

Potential Benefits of Meeting MPS Norms

Complying with the MPS norms carries several advantages for both the PSBs and the broader financial sector, as outlined below:

• Enhanced Market Liquidity: Increased public shareholding can improve the liquidity of the PSBs’ shares. A study by the National Stock Exchange revealed that a 10% increase in public float can lead to a 5-7% increase in daily trading volume. This can make them more attractive to investors, leading to a more stable share price and easier access to capital.
• Improved Corporate Governance: The presence of a larger public shareholder base can encourage greater transparency and accountability within the PSBs. According to a report by the World Bank, PSBs with higher public shareholding tend to have lower non-performing asset (NPA) ratios. This can strengthen investor confidence and improve the overall governance framework.
• Attracting Foreign Investment: Increased public float can make PSBs more appealing to foreign investors, leading to a potential inflow of foreign capital. A recent report by the Confederation of Indian Industry (CII) estimates that meeting MPS norms could attract over $10 billion in foreign investment to the Indian banking sector.

Tightrope Walk for PSBs Nearing MPS Deadline

The clock is ticking for Bank of Maharashtra, IOB, UCO Bank, Central Bank of India, and Punjab & Sind Bank. These PSBs must significantly reduce government holding by August 2024 to meet SEBI’s MPS norms.

Strategic FPOs or targeted QIPs are potential methods, but they require a balancing act. The banks need to dilute government stake while attracting new investors and safeguarding the retail base.

Success can unlock a treasure trove of benefits – enhanced liquidity, improved governance, and potential foreign capital exceeding $10 billion (CII estimate). This MPS journey presents a chance to reshape the Indian banking sector, fostering greater public participation and a more dynamic financial landscape.

Recent Blog : Public Sector Banks Set March Deadline for 3-Year Plans