The Reserve Bank of India's working group on introduction of financial holding structure in India has recommended two options to warehouse the government's holding in public sector banks.
This is in view of the constraint of minimum government shareholding of 51 per cent in these banks.
First option
Under the first option, the government holding in public sector banks (PSBs) gets transferred to a holding company, which also holds shares in demerged bank subsidiaries.
Because of the need for the Government to hold minimum 51 per cent in a PSB, the first option will require the financial holding company (FHC) to be listed while the banking subsidiary can remain unlisted, the report states.
Further, according to the report, the Government would have to continue to support capital requirements of the bank as well as non-bank subsidiaries.
Second option
Under the second option, the Government continues to hold directly in the bank while shareholding of all private shareholders gets transferred to a holding company. The holding company will also hold shares in the demerged bank subsidiaries.
Going by the second option, the Government would be required to support only the capital requirements of the bank. The Government could also encash the value of indirect shareholding in bank subsidiaries.
Post FHC, the Government, under the second option, could continue to hold, in addition to 51 per cent in the bank, shares in various subsidiaries directly equivalent to its existing indirect shareholding. Since there is no requirement of minimum holding in these entities there will not be any need for the Government to provide capital.
The holding company would, as per the second option, effectively, not be a holding company in the sense that it would not be holding controlling stake in the bank. The shareholder dynamics in such cases needs to be examined since there will be two large shareholders — the holding company and the Government, the RBI report states.
Governance challenge
Under the second option, although the public sector character of PSBs would not get compromised and existing government powers can continue to be exercised, the challenge would be governance of the bank with two blocks of directors who could have differing interests.