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In eight cases, the banks would violate the minimum public shareholding norms if their promoter, the Government of India, infused capital as announced.
Last month, the central government announced it was going to recapitalise about a dozen public sector banks.
It was widely accepted that this was a good move and the initial concerns were that these banks needed more capital to come out of the mess they were in.
However, a plain reading of the shareholding pattern of these banks suggests there is little or no room in a majority of cases for promoter infusion.
In 11 of the 13 cases, the banks were falling foul of one capital market regulation or the other.
In eight cases, the banks would violate the minimum public shareholding norms if their promoter, the Government of India, infused capital as announced.
In three of those cases, the promoter was already in breach of the norms and was already required to dilute its holding to permissible levels by April 2017, going by the Securities and Exchange Board of India (Sebi) mandate.
Only two possible reasons can explain this - ignorance of the Sebi framework or utter disregard for it, coming from the knowledge that an exemption can be eked out of the regulator.
Both are bad news. Even some market reactions have sought to brush off Sebi regulations to be of less importance when compared to the larger systemic issues being faced by the banking system.
However, imagine what would have happened to a private sector promoter if she had attempted such a stunt.
In June, Sebi directed the freezing of proportionate voting rights and corporate benefits like dividend, rights, bonus shares, split, etc with respect to the excess of proportionate promoter or promoter group shareholding of a company called Southern Fuel, listed on the Metropolitan Stock Exchange.
The promoter entities, which had a holding of 90.6 per cent, were restricted from dealing in shares, except for the purpose of compliance with the minimum public shareholding norms.
In the case of Accel Frontline, Sebi had in July last year passed similar restrictive orders against the promoters.
Their excess holding was only 0.29 per cent. Yet, it was only in May that these orders were lifted and the promoters let off with a warning.
It could be argued that the April 2017 deadline is still far away. But, does that allow the government to take steps that are the opposite of what it has to?
In a detailed piece, titled ‘The state in business and the business of regulation’, published in the Economic & Political Weekly, Bhargavi Zaveri of the National Institute of Public Finance and Policy deals with the conflict of interest of the state, in its dual role as the law maker and a business owner, that is manifesting in different areas.
Zaveri begins her piece (external link) with the example of State Bank of India, the country’s largest bank, refusing to allow e-voting, mandatory for all companies, to its shareholders.
“The state, by being uniquely placed to influence the outcome of a law, is in a position to unduly favour itself as a business participant, at the cost of its competitors and counterparties,” the article said. Adding, “This conflict of interest manifests itself through the creation of different regulatory standards for public sector units (PSUs) and non-PSUs.”
Suggestions include voluntary adherence to higher standards by the PSUs.
Going by recent examples, it is safe to say state-run enterprises are happy to enjoy special exemptions, wherever available, and are keen to bargain for more such carve-outs, wherever possible.
The larger the organisation, the greater the tendency. Regulators should rethink such exemptions and relaxations.
Not only to preserve the integrity of the marketplace but also to ensure the long-term well-being of these very greedy kids, who want to have the cake and eat it, too.
