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Wednesday, September 20, 2006

Central Bank, UBI, Indian Bank to make market debut in ’07

Three unlisted public sector banks - Central Bank, United Bank of India and Indian Bank - are expected to hit the capital markets early next year with initial public offerings, IPO, which will also see the dilution of the government’s stake by 8-10%. The government, which currently holds a 100% stake in the company, is planning to list these banks between January and March ’07, reports The Economic Times.

The government is planning to clean up the balance sheets of these banks by writing off their accumulated losses against their equity capital. It will help them raise capital to meet capital adequacy norms under Basel-II requirements. An IPO would reduce the government’s holding in these banks from the current 100%.

However, in case of these banks, the government has a large headroom to reduce its holding substantially without diluting its ownership, unlike in most other public sector banks where it has already reached 51%.

Some of these banks are considering converting a part of their equity capital into preference shares for sharper pricing of their IPOs. This will help improve their earnings per share as they can then charge a higher premium.

The government is planning to restructure Rs 278-crore (Rs 2.78 billion) loss of Union Bank of India before its IPO. Central Bank has also submitted a proposal to split its capital base to increase its earnings per share before the IPO. At present, Central Bank has a total equity of Rs 1,124.14 crore (Rs 11.24 billion), while UBI’s figure is put at Rs 1,810.87 crore (Rs 18.10 billion).

The finance ministry has restructured the capital base of Indian Bank by writing off its accumulated loss of Rs 3,800 crore (Rs 38 billion) (as on March 31, ’05) against its equity.

Some of the weak banks have not yet been able to make use of hybrid instruments because of their low ratings. Their ratings will improve once they are listed. The Centre has pumped in over Rs 20,000 crore (Rs 200 billion) as special securities into its unlisted banks over the last decade to shore up their capital base.

After a Cabinet approval recently, these banks can convert non-tradable special securities into tradable securities. This will enhance the flexibility of these banks that invested in the recapitalisation bonds. The banks could not show these investments under the statutory liquidity ratio.

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