The Hindu Business Line : Syndicate Bank opts for QIP route to raise capital

Bangalore, Feb. 6 Public sector Syndicate Bank has decided to raise its additional capital through the qualified institutional placement route instead of the follow-on public offer programme planned early this year.

Syndicate Bank’s move followed the Government’s recent liberalisation permitting public sector undertakings/enterprises to raise capital through placement with placements of equity with qualified institutional buyers (QIB).

Bank of India has already received permission to tap QIBs and is poised to make the placement. QIBs included financial institutions, banks, mutual funds, foreign institutional investors registered with SEBI, venture capital funds and multilateral financial institutions. The shift to QIB option was largely due to the cost considerations.

Syndicate Bank’s capital raising involves issuing an additional 8 crore (80 million) equity shares. The additional issue was expected to raise the paid up equity capital to Rs 601.97 crore from the current level of Rs 521.97 crore. Syndicate Bank’s scrip was last priced at Rs 95.50 per share at the close of Wednesday’s trading. The equity float was expected to bring down Government stake in the bank from the current level of 66.47 per cent to around 57.64 per cent.

Urgent need

Syndicate Bank currently has an urgent requirement of capital for pursuing its asset growth. The bank currently has a capital to risk weighted asset ratio of 11.99 per cent. However, its tier 1 capital was 6.99 per cent or 99 basis points over the prescribed threshold of 6 per cent. Although, the migration to Basel II, would release some capital from retail and credit-rated assets, part of the capital would be absorbed by operational risk requirements, bank officials said.

indicator approach

Under the current RBI guidelines, domestic banks are expected to adopt the basic indicator approach. This approach prescribes that banks hold capital for operational risk equal to 15 per cent of the previous three years annual gross income. Bankers said that Syndicate Bank also had the flexibility to raise at least Rs 240 crore through perpetual bonds, to push up the tier one capital ratio.

medium-term notes option

But attempts to raise additional capital through medium-term notes (MTNs) were proving to be expensive. Bankers said MTNs appeared a low-cost option in view of the drop in the London Interbank offered rate to around 3 per cent, after the cut in US interest rates. But the spread over LIBOR sought for the Syndicate Bank MTN was anywhere between 300 and 350 basis points. The spread over Libor for the Canara bank MTN in 2006 was 125 basis points and in the case of the private sector Axis Bank (formerly UTI Bank), the spread was a little over 150 basis points.

Banking analyst with Angel Broking, Mr Vaibhav Agarwal said, “Risk premiums for Indian corporates are on the ascent. Syndicate Bank is no exception.”

Syndicate Bank’s officials, who have also factored this hardening risk premiums said, “We will look into the MTN option when the markets are more favourable,” the officials added.