The Hindu Business Line : Time to take a leaf out of China's books

With Basel II effective from March 31, 2007, several banks may need additional capital. With the buoyant capital market, it should not be difficult for banks to raise capital from the market, especially when the sector is performing well.

ONE is not sure what the Prime Minister, Dr Manmohan Singh, makes of it. One is not aware of what India's Left thinks of it. It is Communist China selling equity stake in government banks to Imperialist America. It is the $9.2-billion initial public offering in Hong Kong by China Construction Bank (CCB) early this month. The CCB listing is the first ever overseas flotation by one of the Big Four state banks in China and is to be followed by Bank of China and Industrial and Commercial Bank of China, the country's biggest lender, going by reports in the Financial Times (dated Nov. 29). Mr Zhou Xiao-chuan, China's central bank Governor, has defended the move, parrying local criticism that bank shares have been sold too cheaply to foreign investors.

CCB's shares were sold pre-IPO to foreign investors, including Bank of America and Temasek, the Singapore state investment agency, at about 1.2 times the book value and are now trading at about 2.7 times. Mr Zhou has said the deal did not involve government subsidy and adds: "But as China's asset disposal market remains inadequate in depth and weak in pricing power, the price difference ... .. between wholesale and retail (investors) should be viewed as the cost of the financial reorganisation."

For RBI Governor, Dr Yaga Venugopal Reddy, ever suspicious of foreign investments in Indian banks, the Chinese experiment will not be worth trying out. In Dr Reddy's regime, foreign investment is a firm no-no "since banks are `special' and play a fiduciary role."

One presumes banks in China are also "special" and play a fiduciary role. In India, government banks, comprising 80 per cent of the banking system, will continue to be run by banks (or is it biharifying the system?) with New Delhi holding 51 per cent stake. With Basel II effective from March 31, 2007, several banks may need additional capital. "The RBI has initiated supervisory measures to identify the gaps, and assess as well as quantify the extent to which additional capital will be required by banks.

In the past, banks have tended to rely mainly on retained earnings to strengthen their capital position. However, with the buoyant capital market, it should not be difficult for banks to raise capital from the market, especially when the banking sector is performing well. The RBI has suggested certain amendments in the Banking Regulation Act, 1949, which are expected to enable banks to augment their capital base while maintaining Government shareholdings at the prescribed levels in public sector banks," says the Report on Trend and Progress of Banking in India, 2004-05.

Is it not simpler for the government to bring down its stake to 26 per cent leaving the rest to Indians and foreigners? How is majority government holding in a bank any comfort to depositors after two financial scams more or less originating in government banks? In this mix, ICICI Bank will be the famous exception when on December 1 it will be raising through a second issue some Rs 7,000 crore from Indians and foreigners. The RBI is stuck as ICICI Bank "has no identifiable promoters".

ICICI Bank belongs to a rare species as nothing like it is alive in the Indian financial system. As on November 18, 2005, government-controlled shareholders held 15.05 per cent equity — LIC (9.35 per cent), GIC and other government-owned general insurance companies (5.46 per cent), UTI (0.09 per cent), other government-controlled institutions, corporations and banks (0.16 per cent).

Other Indian investors had 12.55 per cent - individual domestic investors (6.02 per cent), Bajaj Auto (3.08 per cent), Indian corporates and others (excluding Bajaj Auto) (0.94 per cent), mutual funds and banks (other than government-controlled banks) (2.51 per cent). The Indian investing community has a combined stake of 27.60 per cent. Foreign investors have bagged 72.40 per cent — Deutsche Bank Trust Company Americas as depository for ADS holders (27.18 per cent), Allamanda Investments Pte. Ltd (8.94 per cent), other FIIs, foreign banks, overseas corporate bodies, foreign companies, foreign nationals, foreign institutional investors DR and non-resident Indians (36.29 per cent).

With the new issue, the stakes could change. Privately some government bankers crib over the style and substance of ICICI Bank. That is to be expected.

Instead, SBI (along with its associates), can perhaps do better than ICICI Bank if only New Delhi and the RBI can get out of the Stone Age. Will Mera Bharat Mahan be ever allowed to be Mahan?

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