Suggested options for equity infusion under Bank Recap plan

As discussed with A Rajagopal (Scient Capital), Ratnesh Kumar (BOB Capital), G Padmanabhan (Chairman, BOI) and N. Damodharan (ED, BOI)

Suggested options for equity infusion into Indian banks by Government of India (GOI), under the Bank Recapitalization plan.

1) The Options

There are four possible routes that can be adopted by GOI (either directly or indirectly through an intermediate entity), for infusion of equity into Indian banks under the Bank Recapitalization plan. These are:

a) Preferential Allotment of Shares (PAS) to GOI

b) Rights Issue

c) Combination of PAS and a Qualified Institutional Placement (QIP) 

d) Additional Tier I (AT1) issuance

2) Principles for evaluating the options

Suggest the objectives for evaluating the alternatives should be:

a) Try and obtain fresh infusion from other investors alongside GOI, to fill the INR 58k external requirement, and to maintain GOI stake in Indian Banks at current levels. Getting external funds would also help avoid the complications of >5% creeping acquisition guidelines and breach of 74% holding by GOI as largest shareholder

b) Be fair to all stakeholders, especially to minority shareholders, in all aspects including pricing

c) Keep the process as simple as possible, and minimize the need for forbearance/ exceptional approvals from SEBI/ RBI etc.

3) The suggested route

Given the above objectives, we suggest the best route is the PAS + QIP one.

Operationally, this is simple to do, and can be done in 30-45 days. For larger banks, QIP money should come in readily, to keep the percentage of GOI stake at pre-recapitalization levels. The pricing for both PAS and QIP is market linked per SEBI rules, and this protects minority shareholders - there is no undue advantage to any large investor, and any minority investor worried about dilution of her stake can always buy additional stock in the current market.

Market experts reckon that through a QIP process, getting in INR 58k of other investor money by March 2018 should be achievable.

We would not recommend a Rights issue. On the positive side, this option does provide minority shareholders equal opportunity to participate in the infusion. However, as mentioned earlier, a simultaneous QIP and PAS achieve pricing protection for minority shareholders as well. Also, Rights issue pricing typically happens at a discount to Theoretical Ex-rights Price (TERP). Lastly, and importantly, a rights issue process is just too onerous – it involves reaching out to millions of investors, going through an exhaustive legal and operational process, etc. Minority shareholders should not be averse to a PAS + QIP, in fact they generally welcome them as improving the value of their holdings.

However, a PAS + QIP (or even a Rights Issue) may not work for weaker banks, where non-GOI investor interest may be low. In those cases, a straight PAS or an AT1 issuance may have to be looked at. A straight PAS may involve issues of creeping acquisition of more than 5%, and breach of 74% stake limit by GOI in some banks.

Alternatively, perhaps weaker banks should not be funded directly - instead, stronger banks may be given more PAS/ QIP infusion than needed, giving them space to consolidate the smaller banks.

On the possibility of AT1, there are a few considerations to mull over. For one, the real bank capital issue is the pressure of low Common Equity Tier I (CET1), and not so much overall Tier 1 capital. An AT1 doesn't really help in such cases. Secondly, from a GOI perspective, they are taking substantial equity risk through the infusion - why would they not take it as straight equity, which gives them the best possible upside. Thirdly, bankers see AT1 as having too much of a real bottomline cost, as opposed to common equity. Lastly, AT1 instruments are fairly illiquid. With common equity, GOI always has the option of doing an equity sale for divestment at the appropriate time, whereas with AT1, they would typically have to wait for redemption.

Tweet

Postingan terkait:

— Friday, November 3, 2017 — Add Comment