As part of the long-promised financial sector reforms, the government on Monday kickstarted the process of diluting its equity in select public-sector banks (PSBs) and listed public financial institutions (PFIs) by inviting bids from merchant bankers and legal advisors.
Finance Minister Nirmala Sitharaman in her 2021-22 Budget speech had also announced the government’s intention to take up privatisation of two PSBs, besides IDBI Bank.
The Department of Investment and Public Asset Management (DIPAM) has issued Request for Proposal (RFP) for transaction advisors for a period of three years from the date of empanelment, with the possibility of a one-year extension. The empanelment fees are set at ₹1 lakh for merchant bankers and ₹50,000 for legal advisors.
According to the government’s disinvestment strategy, five public-sector lenders, including Bank of Maharashtra (86.46 per cent), Indian Overseas Bank (96.38 per cent), UCO Bank (95.39 per cent), Central Bank of India (93.08 per cent), and Punjab and Sind Bank (98.25 per cent) are required to reduce their government stakes to below 75 per cent. This is to be compliant with the Securities and Exchange Board of India (Sebi) Minimum Public Shareholding (MPS) norms.
Under Sebi regulations, all listed firms must maintain a minimum public shareholding of 25 per cent, with a special forbearance granted to state-owned banks, allowing them time until August 2026 to comply with this requirement.
The government currently owns 82.4 per cent share in GIC Re, 85.44 per cent in New India Assurance Company Ltd, and 96.5 per cent in Life Insurance Corporation (LIC).
LIC has been given time till May 16, 2027 by Sebi to achieve 10 per cent public shareholding.
Sanjay Agarwal, senior director at CareEdge Ratings, said since most of these PSBs do not require significant equity infusion for next few years, given their current capital position, the government may offload some of its stakes in the secondary markets. “However, large availability of floating stocks of these banks may have an adverse impact on the stock prices. Further, given the recent market volatility, the government may find it difficult to realise acceptable prices for these shares,” Agarwal added.
The DIPAM notification specifies that bidders should have advised, handled, and completed at least two equity capital market transactions in the banking, financial services, and insurance (BFSI) sector between April 1, 2022, and the day prior to the bid submission. Additionally, these transactions must meet the size requirements outlined in the empanelment category the bidder is applying for.
The merchant bankers will be tasked with managing all aspects of the transaction, which includes advising the Government of India (GoI) on the timing and modalities for the dilution of government equity in select PSBs and listed PFIs, using Sebi-approved methods. They will also be responsible for structuring the transaction in line with the prevailing regulations, including those of Sebi, the stock exchanges, the Securities Contracts (Regulation) Act, the Companies Acts of 1956 and 2013, the Banking Regulation Act of 1949, and other relevant statutes and guidelines.
The responsibilities of the merchant bankers will also include conducting market surveys, organising domestic and international roadshows to generate investor interest, and arranging meetings with both domestic and international investors, including institutional investors and high-networth individuals (HNIs). They will also market the banks’ growth potential and strategically position the lenders for investment. All expenses for these activities, except for travel and accommodation expenses of government and PSB officials, will be borne by the bankers.
In addition to these tasks, the merchant bankers will be responsible for due diligence activities and preparing necessary documents, such as the Draft Placement Document and Placement Document, to complete the transaction. They will also coordinate the work of intermediaries and ensure all regulatory and statutory requirements are met, which may involve updating documents and papers as needed.
