RBI recommended 2 Options to Warehouse the Government's Holding in Public Sector Banks

The Reserve Bank of India's working group on introduction of financial holding structure in India submitted its report on 23 May 2011. The Working Group headed by RBI Deputy Governor, Shyamala Gopinath recommended two options to warehouse the government's holding in public sector banks. The recommendations were made in view of the constraint of minimum government shareholding of 51 per cent in these banks.

First option

The government holding in public sector banks (PSBs) are to get transferred to a holding company, which also holds shares in demerged bank subsidiaries. The first option will require the financial holding company (FHC) to be listed while the banking subsidiary can remain unlisted due to the government’s need to hold minimum 51 per cent in a public sector bank (PSB). Under the first option the Government would have to continue to support capital requirements of the bank as well as non-bank subsidiaries.

Second option

Under the second option, the Government will continue to hold directly in the bank while shareholding of all private shareholders gets transferred to a holding company. The holding company will also hold shares in the demerged bank subsidiaries. The Government would be required to support only the capital requirements of the bank and it can encash the value of indirect shareholding in bank subsidiaries.

The Government, under the second option, can continue to hold, in addition to 51 per cent in the bank, shares in various subsidiaries directly equivalent to its existing indirect shareholding. Since there is no requirement of minimum holding in these entities there will not be any need for the Government to provide capital. Under the second option the public sector character of PSBs would not get compromised and existing government powers can continue to be exercised. However the challenge would be the governance of the bank with two blocks of directors who could have differing interests.

Under the second option, the holding company will effectively, not be a holding company in the sense that it would not be holding controlling stake in the bank. The shareholder dynamics in such cases needs to be examined since there will be two large shareholders — the holding company and the Government.