<div><strong>Raghu Mohan</strong><br><br>One stone, two birds. What else is one to make of the move to make fungible foreign direct investment (FDI) and foreign institutional investor (FII) limits in private banks?</div><div> </div><div>Let’s take the bonanza first – for banks that reside in the private bank universe that is. The move is basically administrative in nature: you can do a qualified institutional placement (QIP) and not bother about sub-limits to raise capital; it, therefore, cuts down on the lead-time to do so. As Chanda Kochhar, MD & CEO, ICICI Bank observes: “The decision to remove the sub-limit restrictions within the overall limit of 74 per cent for private banks will provide greater flexibility to banks and investors.”</div><div> </div><div>The move follows the Centre’s July cabinet decision to go in for a 74 per cent cap for all foreign investments and get rid of sub-limits like FDI, FII or investments by non-resident Indians. The only reason why we don’t have 100 per cent fungibility is due to the Reserve Bank of India (RBI) – its concern was the distinction between private and foreign banks would blur.</div><div> </div><div>Says Parag Jariwala, vice-president (Institutional Research, Banking and Financial Services) at Religare Capital Markets: “Among private banks, in the case of HDFC Bank, the 74 per cent total limit has already been reached. For Kotak Bank, the 49 per cent FII has been reached; it can benefit as foreign holding can go up to 74 per cent”.</div><div> </div><div>It’s also a plus for Axis Bank (42.5 per cent) and Yes Bank (42 per cent) as they were close to the FII limits (of 49 per cent) and were, therefore, out of the MSCI index – as the headroom for FIIs to buy was to be exhausted soon.</div><div> </div><div>In the case of Yes Bank, it already has both board (April 2015) and shareholder nod (June 2015) to increase the FII limit up to 74 per cent. “We now have headroom to substantially increase FII holding; this will enhance flexibility of various capital-raising options, including American Depository Receipt, Global Depository Receipts, and QIP plans”, says Rana Kapoor, MD & CEO, YES Bank.</div><div> </div><div><strong>What About State-run Banks?<br><br><img alt="" src="http://bw-image.s3.amazonaws.com/LIFE-IN-THE-SLOW-LANE-lrg_0.jpg" style="width: 649px; height: 397px; margin: 1px;"></strong><br> </div><div>You still have a question mark as to whether the Centre has the political capital and courage to dilute its stake in state-run banks to under 51 per cent – for it’s one thing to capitalise banks for Basel-III; entirely another to continue to hold 51 per cent in these banks even as pressure for resources mount from all quarters.</div><div> </div><div>The Centre’s `Indradhanush’ plan (with its seven elements on appointments, board of bureau, capitalisation, de-stressing, empowerment, framework of accountability and governance reforms) saw thirteen state-run banks receive capital of Rs 20,058 for the current fiscal; plus an additional Rs 5,000 crore on efficiency parameters. State Bank of India got the highest amount of Rs 5,511 crore followed by Bank of India (Rs 2,455 crore), IDBI Bank (Rs 2,229 crore), Punjab National Bank (Rs 1,732 crore) and Indian Overseas Bank (Rs 2,009 crore). The Centre is to infuse Rs 10,000 crore each over the next two fiscals as well.</div><div> </div><div>As Saswata Guha, Director-Fitch Ratings told BW (10th August 2015): “They (state-run banks) have limited recourse to core equity in the short-term, and have to rely on the government. Declining profitability has hurt internal capital generation; low valuations have virtually precluded access to equity markets and increased their dependence on state support for capital”.</div><div> </div><div>And now you have fungibility for private banks. As state-run banks squirm over capital, private banks will walk away with more business (and investors will hand over the latter more money). Where does that leave state-run banks? You decide.</div><div> </div><div> </div><div> </div><div> </div><div> </div>
