PSU bank recapitalisation: Golden share an option for govt

Santosh Nair
moneycontrol.com

It has been mooted quite a few times since 2000, without ever becoming a reality. But faced with the daunting task of having to provide a few lakh crore of capital to PSU banks over the next 2-3 years, the new government may have to give serious thought to the concept of golden share.

In a golden share arrangement, the government can hold less than 51 percent in state-owned banks, but still retain control as it has the power to veto changes to the company's charter. This type of share controls at least 51 percent of voting rights in a company.

The concept was implemented by the UK government in the early 80s when it had privatised many state-owned companies. At that time, the rationale was to prevent a takeover of the newly privatized companies.

Takeover of state-owned banks in India is unlikely, but any move by the government to reduce stake below 51 percent is likely to face stiff resistance from bank unions and opposition parties.

And yet there is no denying that PSU banks are in dire need of capital because of the rising pile of bad loans which entail higher provisions.

According to npasource.com, gross non-performing assets in the banking system stood at Rs 2.43 lakh crore at the end of December 31, 2013. Of this, ten out of the 40 listed banks accounted for nearly 70% of the total gross NPAs.

"You are talking about a recapitalisation of the banking system of Rs 3.5-4 lakh crore in the next three years," Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank said in a recent interview to CNBC-TV18.

"The new government will be challenged on what to do with 51 per cent ownership in public sector banks," he added.

The government is in a bind. Firstly, it does not have that kind of money to provide banks. Secondly, even if were to do so, it would end up owning 70-80 percent or even more, in PSU banks, which is clearly undesirable. A practical solution would be to allow banks to raise capital from the market. But, if a big chunk of the capital comes from the market, the government's stake would come down considerably.

So a golden share would be the best bet for the government to achieve its twin objective of recapitalization of PSU banks without losing control over them.

The proposal was mooted by BJP leader Yashwant Sinha when he was Finance Minister in the NDA government.

Excerpts from his interview to Business Today in March 2000:

"There is a need to recapitalise many of them (PSU banks). If I had the money, I would have given it to them since I am the owner. But I don't have the money. The Narasimham Committee went into this question, and suggested that we allow the government equity to come down to 33 per cent. I have accepted that on 2 conditions: one, I am not going to disinvest but tap the market to raise the bank's equity-base. And two, that I won't change the public sector character of the banks.

That means that present levels of controls we have over the banks will continue. We will still appoint their chairman and the directors. And those who are saying that I can't have my cake and eat it too, should realise that I will do it through a legislation. I will change a few provisions of the Bank Nationalisation Act. In the UK, for instance, there's the concept of golden share."

In 2006, media reports said the UPA government was considering golden share in PSU banks to give them more flexibility to raise capital and compete with private sector banks on an equal footing. However, the proposal is learnt to have been opposed by the Left Parties, which were insistent that the government holding in state-owned banks should not fall below 51 percent.

In October 2007, the then SBI chairman OP Bhatt too had mooted the idea of a golden share.

"The question is if you look at it traditionally for increasing capital and if the government shareholding should not go below 51%, then the government — as owner-has to bring a pro-rate share for each increase of capital " Bhatt was quoted as saying in a report in The Economic Times.

"So either the government does that, and if it cannot, then there could be some concept of golden shares or non-voting shares or some other capital structure plan where the government would have ownership control," Bhatt said.

Bhatt's worry at that time was that PSU banks were losing ground to their private sector counterparts because of their inability to raise capital.

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