SBI may raise funds, merge associate banks

India’s largest bank, State Bank of India would now have the Government as its 59.73% shareholder, which it has bought from RBI for Rs.40,000 crore. The stake transfer primarily happened as it was inconsistent with RBI to play the role of being owner of a commercial bank and as a banking regulator.

The government will value 31.43 crore SBI shares with face value of Rs 100 each, held by RBI, at the average closing price for the past six months and moving average for the previous fortnight. Once the SBI amendment Bill is passed in Parliament, it can reduce its holding from 59.73% to 51%. At present, Govt. stake in SBI cannot fall below 55%.

There is also speculation that the government will bring a SBI public issue in the next three months and raise at least Rs.5,000 crore. The amount raised shall be used to expand existing operations and enter venture capital, private equity and wealth management segments.

The issue is small as compared to ICICI Bank FPO, but this is due to the restrictions imposed owing to the 55% government holding. The bank needs this money to widen its capital base and meet the Basel II guidelines on capital adequacy which come into effect from March 31, 2008.

Also, there may be a possible merger of State Bank of India with its seven associate banks. But initially the seven banks may be merged to create the third largest bank in the country, after SBI and ICICI Bank, in terms of assets and the second-largest in terms of branch network.

SBI has already integrated the treasury operations of the seven associate banks and created provisions for swapping non-performing assets collectively by the associate banks. SBI would transfer its stake in these banks to a separate holding company which will then absorb the seven associate banks.

The merger would unlock value and remover geographical overlapping. It will help SBI to gain size and face competition post 2009 when foreign banks enter the markets. But the concern is the possibility of rift in case of layoff due to merger and difficulty in valuation as of the seven associate banks, only three are listed.