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Thursday, March 16, 2006

Central Bank seeks to convert part equity


The Central Bank of India has approached the Centre for converting part of its equity capital into other tier-I instruments such as preference shares, ahead of its proposed initial public offer, IPO, reports Business Standard.

This move, according to bank officials, will help it to reduce the bloated capital base and, thus, charge a higher a premium by improving the earnings per share.

Recently the Mumbai-based bank made a presentation to the government of India and Reserve Bank of India for turning part of Rs 1,124 crore (Rs 11.24 billion) equity capital into other instruments. It is awaiting response from the owner and regulator, senior bank official said.

Initially, the bank wanted to return part of capital to the government as bloated equity base was constricting its earning per share.


The public offer would only happen in next financial year, the official added. The public issue would help raise fresh equity capital as its capital adequacy is expected to fall by 2-3% on implementing the stringent Basel II capital adequacy.

Simultaneously, the public sector bank is also planning to raise up to Rs 500 crore (Rs 5 billion) through subordinated bonds to increase capital base and support business growth.

The RBI's decision allowing banks to treat their investment fluctuation reserves, IFR, as part of tier-I capital has provided the bank additional headroom to raise fresh tier-II capital.

As per the RBI norms, the provisions made towards IFR can be reckoned a part of tier I from April 1, 2006. Earlier it used to be calculated as part of the Tier II capital.

The bank's capital adequacy ratio was 12.15% as on March 31, 2005 with tier-I capital adequacy at 6.08% and tier II at 6.07%. Its IFR at the end of March 2005 was Rs 780.11 crore (Rs 7.80 billion), up from Rs 587.04 crore (Rs 5.87 billion) at the end of March 2004.

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