The government is looking to dilute a large part of its equity stake in the third largest private bank in the country – Axis Bank. Currently, the Specified Undertaking of UTI (SUUTI) holds 27 per cent in Axis Bank (formerly UTI Bank). The Economic Times reported that the government is looking to sell around 21 per cent of this through a qualified institutional placement (QIP) to a broad set of investors. The stake is currently valued at around Rs 5,000 crore ($1.2 billion). The report adds that the government will not sell out completely as there is a lock-in clause on 6 per cent of the equity, following an earlier QIP.
The idea behind bringing a diverse set of investors in Axis Bank through QIP is that it will ensure that the banking regulator’s norm of capping a single investor’s shareholding in a bank at 5 per cent is adhered to. Besides SUUTI, insurance giant LIC holds a large stake of 10 per cent in Axis Bank. The other prominent shareholders in the bank include: HSBC Financial Services, Orient Global Tamarind and ICICI Prudential Life Insurance Company all holding 4 per cent plus each.
The SUUTI was formed over five years ago after the assets and liabilities of the then UTI Mutual Fund, was bifurcated into two. SUUTI had to warehouse the large equity holdings of that fund along with other assets including property besides 25 assured return schemes. Given that the last of the tax free bonds which were issued to unitholders is close to being redeemed, the undertaking may be wound up in 2009.
The sale of stake is also linked to some budgetary provisioning for raising Rs 9,000 crore this fiscal. However, the tricky part is the timing of the QIP. The stock market is trading at one year low and banks are particularly hit by the sharp correction. Axis Bank is trading at 50 per cent discount to its one year high of Rs 1,291.
While the government would look to generate maximum that it can get out of the stake sale in what is ranked amongst the most promising private sector banks for the future, the state of the markets may not allow a big jump in valuations from current levels. A negotiated sale of stake could have fetched better returns but that could potentially face roadblocks so a QIP issue may be in the offing.
PSU Bank Divestment On Cards
The goverment can also look at divestment of stake in some other PSU banks that it holds a stake in, Mint reported. But the law does no permit the government the government to reduce its stake in these banks to below 51 per cent. In 1998, Narasimham Committee had recommended government to bring down its stake in PSU banks to 33 per cent. Earlier this year Planning Commission had also asked the government to reduce its stake in the public sector banks to 33 per cent from the present level of around 70 per cent.
Punjab & Sind Bank and United Bank of India are two banks in which the government holds a 100 per cent stake. There are several banks which have managed to reduce the government holding to around 51 per cent, which include Andhra Bank, Dena Bank and Oriental Bank of Commerce. Some other banks in which the government can look to sell its stake without an amendment in the law are Central Bank of India, Indian Bank, Bank of Maharashtra, Uco Bank and Canara Bank. In all these banks government has a stake between 73 per cent to 80 per cent.