SBI likely to go for rights issue to meet capital requirements, quantum & timing of issue not finalized yet

State Bank of India (SBI), the country's largest lender, is likely to go for rights issue to raise funds for meeting capital requirements, official sources said. "It would most probably be the rights issue," a key official said amid speculation over the mode of raising resources. However, the quantum and timing of the issue is yet to be finalised, the official added.
The rights issue would allow SBI to raise Tier-I capital without diluting government stake, which currently stands at 59.73%. The government had recently bought RBI's entire holding of 59.73% in SBI. The government may dilute its stake up to 55% and a bill to further dilute government's stake in SBI up to 51% is pending in Parliament. The bill was referred to the standing committee whose report was tabled recently. Last month, SBI chairman O P Bhatt said the bank will decide in two months whether to go for a rights issue or follow-on public offer for rising funds.
"It is still taking shape. The decision would be taken in a month or two," he had said. Besides, the bank plans to raise about Rs 15,000 crore during the current fiscal through a mix of Tier I and Tier II bonds to meet capital requirement.
SBI has set up a target to raise over Rs 89,000 crore in the next five years. "Based on the sensitivity analysis of its capital position, capital augmentation programme of SBI envisages raising about Rs 89,600 crore as capital funds during the next five years," Pawan Kumar Bansal, minister of state for finance said. Late last month, the SBI board had approved merger of the State Bank of Saurashtra, while there were plans to merge other associate banks as well.
The government, however, is of the view that the SBI should first list its unlisted subsidiaries for greater unlocking of value before merging them with the parent bank. This, it says, will drive up valuation for the bank. SBI, however, has communicated to its associates that they must put their listing plans on hold. The unlisted entities include State Bank of Hyderabad (SBH) and State Bank of Patiala (SBP). However, top officials in the SBI group feel that allowing associates to list will increase the cost of acquisition for the parent bank.
"We feel that it makes sense to let them list first. It will add to the valuation of SBI later. After all, these are as big as several state-owned banks," a government official said. Both SBP and SBH have a balance sheet size more of than Rs 50,000 crore.
He said that the merging the unlisted associates would take longer. It has already set the ball rolling with its move to acquire State Bank of Saurashtra (SBS), its smallest subsidiary bank. "SBS has an asset size of over Rs 16,000 crore, which may be comparable to the business of a main branch of SBI in a metro," the official added. SBH has put its plan to go in for an initial public offer (IPO) on hold until December. If the merger gets delayed by 12 to 18 months, the bank might go for an IPO, top officials of SBH had said.
"SBI needs to meet its capital requirement by divesting its stake in its larger subsidiaries of Patiala and Hyderabad," a senior SBI official said. Merging these associates will also increase the capital adequacy requirements (CAR) for SBI. The bank is expected to come up with a road map for its subsidiaries before the end of this year. Merging the listed subsidiaries, including State Bank of Mysore, State Bank of Travancore and State Bank of Bikaner and Jaipur, will follow later, sources said.
"It does not make economic sense for SBI to list its associates first and then acquire them at a higher price. Besides, there will be procedural hassles," a top official in the SBI group said. While the unions have consented for merger, agreeing to the terms and conditions put forth by SBI management, it does not mean that merging other associate banks will be as trouble-free. The merger of SBH and SBP with SBI would not be easy, as there would be issues related to human resources and branch rationalisation.