Centre likely to remove 10% shareholding cap for individuals in PSBs

Removal of threshold may allow PE firms to own over 10% stake in state-run banks

The Centre is seeking to remove the 10 per cent shareholding cap for individuals in public sector banks (PSBs) — a move that will enable private equity (PE) firms to pick up stakes in PSBs on the block for privatisation.

The government may propose changes through the Banking Laws (Amendment) Bill that seeks to bring changes to the Banking Companies (Acquisition and Transfer of Undertakings) Act and the Banking Regulation Act.

The proposed amendment to the Banking Regulation Act seeks to remove the 10 per cent ceiling for individuals in the paid-up capital of state-owned banks.

Removing the shareholding cap will allow high networth individuals and PE firms to buy a larger stake, as notified by the regulator, in banks. This will also widen the pool of buyers eligible to bid for PSBs.

By removing this cap, the Centre may empower the Reserve Bank of India (RBI) to notify the fresh shareholding threshold from time to time, said an official. The changes to the legislation are seen aiding the privatisation of two PSBs announced by Finance Minister Nirmala Sitharaman in the Union Budget 2021. 

Removal of the individual shareholding cap may allow PE firms to own more than 10 per cent stake in PSBs the Centre shortlists for privatisation. NITI Aayog has reportedly suggested privatising Central Bank of India and Indian Overseas Bank.

Besides mandating a shareholding cap for individuals for non-financial entities, the banking regulator does not allow corporates to own banks, leading to a situation where only banks can buy other banks and subsequently merge, said another official.

The RBI allows regulated institutions, public sector undertakings or the government to own 40 per cent in a bank, and has allowed them to hold even higher shareholding on a case-by-case basis. It restricts shareholding by individuals and non-financial institutions to 10 per cent.

Although the move will pave the way for PE players and individuals to own higher shareholding, the RBI may be cautious while allowing them to own substantial stake in banks since the regulator has also been averse to allow the entry of corporates into banking.

One of the critical requirements in the process of achieving the government’s goal of privatisation of PSBs would be making amendments to the law that restricts non-government shareholding, said Prakash Agarwal, head-financial institutions at India Ratings & Research.

“Currently, the banking regulator has been reluctant to allow corporations to own a bank. In the prevailing circumstances, it is somewhat difficult to imagine it would allow PE firms to own a bank,” said Agarwal.

Given the shareholding restriction, in keeping with the Banking Regulation Act, working around the relaxations would be critical to the privatisation of PSBs, said Anil Gupta, vice-president, ICRA.

The shareholding structure of the privatised bank should be sustainable in the long term, added Gupta.

Through the Banking Laws (Amendment) Bill, the Centre is seeking to bring down its shareholding in PSBs, from the currently mandated threshold of 51 per cent to an arrangement that would help the Centre in exiting state-owned lenders completely in the future.

The government is yet to decide on the quantum of stake it would retain initially. In the previous draft of the banking amendment laws the Centre was planning to move in the winter session of Parliament, the government had sought to retain 26 per cent in PSBs, even after privatisation.

Reducing shareholding below 51 per cent in PSBs earmarked for privatisation may require the Centre to grant them a banking licence, Business Standard reported last week.

HIGH STAKES
 

Now
 

Individuals can own up to 10% in public-sector banks (PSBs)
 

Proposal
 

Removing the 10% cap and empowering the Reserve Bank of India to notify the shareholding threshold from time to time
 

What it means
 

The move will open the door to private equity funds to buy more than 10% stake in PSBs on the block, widening the pool of eligible buyers and aiding privatisation