Govt may pare stakes in some banks to 33%

The government is considering a proposal to privatise some state-owned banks in phases, according to official sources. 

A proposal for setting up a holding company two years down the line will be the first step in this direction.

The Bank Investment Company, which will replace the proposed Bank Boards Bureau, may pare its stakes in public sector banks to 33 per cent.

"Privatisation is definitely on the agenda, else we would not have talked about the Bank Investment Company," said an official who did not want to be named. 

The setting up of the Bank Investment Company will require repealing the Bank Nationalisation Acts of 1970 and 1980, the SBI Act and the SBI (Subsidiary Banks) Act. Besides, the public sector banks will need to be incorporated under the Companies' Act. 

"The Bank Investment Company will require legislative changes. We will still control the Bank Investment Company, but it need not control 51 per cent in public sector banks. Rather it could control 33 per cent," the official said. 

Finance Minister Arun Jaitley announced a seven-pronged strategy called Indradhanush two weeks ago to improve the performance of public sector banks. 

The bureau will be an interim mechanism till the Bank Investment Company comes into being. It will be functional from April 1, 2016, essentially selecting heads of public sector banks and help them develop strategies to raise capital. 

A holding company structure for public sector banks was mooted by former finance minister Pranab Mukherjee in 2012 to address their capital needs. 

Road to privatisation

"The Bank Boards Bureau is the interim measure and after a couple of years, we will probably go for it (the Bank Investment Company)," said Hasmukh Adhia, secretary, department of financial services. 

Recommendations by former Reserve Bank of India governor M Narasimham in 1998 were accepted by Yashwant Sinha, the finance minister in then National Democratic Alliance (NDA) government. But these failed because of intense political opposition. 

The recommendations said lowering the minimum government holding to 33 per cent in public sector banks would allow them to meet minimum capital requirements. 

The P J Nayak committee also recommended last year the government cut its stake in public sector banks to below 50 per cent. 

"It is a staged way of going about privatisation. That is how you have to build support," said the official. "It is not going to be easy to have it passed by the Rajya Sabha, where it will be resisted by the Left and the Congress." 

The reduction in the government shareholding below 50 per cent will free public sector banks from oversight by the Central Vigilance Commission, the Right to Information Act, and constraints on employee compensation. 

Experts, too, feel the government has enough elbow room to divest in banks. 

"There is ample headroom for the government to dilute equity in PSBs and still retain ownership. However, the important thing is to improve capacity of management to take decisions, and provide continuity of leadership," said Shinjini Kumar, leader, banking and capital markets, PricewaterhouseCoopers.