Opinion

Re-imagining PSU bank privatisation

Ashish Kapur/Vineet Agarwal | Updated on May 18, 2021

Rather than an ‘upfront majority stake-sale’ approach, a ‘nuanced creep-up investment’ solution would be a better option

Although the sudden surge in the pandemic has caused an apparent loss of momentum in the government’s privatisation exercise, it remains very much on the table. Plenty of behind-the-scene activity has transpired post the public sector bank (PSB) sale announcement in the Budget.

Besides multiple meetings within the government and NITI Aayog confabulating on the form and substance of privatisation through April, capital was also infused into divestment candidates — Indian Overseas Bank and Central Bank — on March 31, which should enable them to exit the RBI’s prompt corrective action framework.

The equity market, too, has picked up cues with enhanced April trading volumes seen in strong contenders like Bank of Maharashtra. Besides clearing IDBI Bank’s strategic sale, early creation of a National ARC is being facilitated that’ll help the PSB divestment process.

While re-energising the PSB privatisation momentum remains a priority, the government will need to tread carefully to avoid further pitfalls, balance out interest of all stakeholders and make the process publicly palatable taking into account the conspicuous collective sentiment and fragile fiscal finances.

There are many key questions on the privatisation structure staring on the horizon. How much of a PSB stake should the government sell and how to? Should the entire stake be sold in one go or be done gradually?

An upfront stake sale of close to 50 per cent through a ‘Swiss challenge’ method can be structured to investor-buyers at a premium to the prevailing market price. The investor can recover the premia paid by reducing promoter holding over time to the regulatory 26 per cent comfort zone. The government’s remainder share, say 30-40 per cent depending on the PSB being privatised, can be pared down later in competitive open market sale tranches.

With such a mechanism, the government somewhat blunts the argument of selling family silver at throwaway prices and pushes through the privatisation maze, amidst employee opposition and public outcry.

The question is whether this will be the optimum strategy of divestment. Will investors pay a premium considering the bank’s financial health, pension liabilities, rationalisation challenges and when most PSBs are trading at a price to book (P/B) ratio of <1?

Or is there a better way to structure the programme, which leads to value creation for all stakeholders? While clearing up books is welcome, transferring out excess employees to other banks wouldn’t be of much help. The primary consideration for any investor, be it a bank or corporate NBFC, will remain the target’s branch network across geographies, stable liability franchise and market positioning especially in the retail and SME space.

Stakeholder perspective

No investor would want to struggle navigating through cultural integration and low employee morale cauldron while focussing on critical business retention/expansion strategies necessitating periodic capital infusion.

So, what’s the solution strategy? What if instead of an ‘upfront majority stake-sale’ approach, there’s a ‘nuanced creep-up investment’ solution, wherein deep pocket reputed investors work with professional management, to deliver a workable win-win outcome for all. The proposed strategy blueprint is:

Independent authority: Transfer the entire government stake in the relevant PSB to a separate quasi authority like SUUTI (Specified undertaking of the Unit Trust of India), signalling a clear intent to divest at market prices once the bank’s financial health improves, committing to maintain an arm’s length from the bank’s management and removing vigilance overhang that affects decision-making.

Governance: In addition to reputed independent directors, strengthening the bank board through addition of eminent banking talent from the industry and making the senior bank executives accountable for time bound implementation of revised business plans.

Capitalisation by anchor investor: Fresh capital infusion by an anchor investor, selected amongst eligible bidders via open auction to give it a significant minority stake, thereby diluting overall government stake.

The selection bid mechanism could be similar to erstwhile SEBI screen-based auctions that involved FPIs/FIIs placing premium bids for winning government and corporate debt limits.

Share sale: There is no stake sale to the private anchor investor. No sale of family silver here and no case for public opposition. Over next few years, with regular capital infusions, the anchor investor holding creeps up to the desired regulatory comfort level.

Divestment target and dividends: (a) The capital receipts to the exchequer will accrue vide subsequent sales in driblets in the open market, post restoration of the banking house.

b) The government, however, continues to earn precious bread and butter revenue receipts to meet budgetary priorities, through regular and even one-time structured dividends via SUUTI, which is expected to retain majority holding in the near future. A planned dividend history also benefits the share price, thereby eventually yielding better price as SUUTI pares down its holding.

c) Short-run divestment shortfalls can be met by quickly disposing of marginal SUUTI/government stake in blue chips; generate value from unlisted holdings like NSDL and SHCIL; and fast-tracking smaller PSU privatisation that are far less complex than PSB divestments which attract scrutiny at every step.

Stakeholder welfare: The anchor investor brings in much needed capital for growth besides supporting the bank improve its market positioning, taking along all stakeholders by upping the employee learning curve and rewarding performers.

PSB house bank sale can be fast-tracked when potential investors see a home in it and if an enabling environment for employees ensues, the government would have hit a divestment home run.

Ashish is a certified treasury manager and veteran corporate banker, and Vineet is a market analyst with expertise in capital markets and project finance

Published on May 17, 2021

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