The government is set to increase its stake in Bank of Baroda (BoB), Oriental Bank of Commerce (OBC) and Dena Bank.
Sources familiar with the developments said the government is planning to subscribe to a preferential equity issue that could raise its stake in these banks by 10 per cent.
The government recently held discussions with all the public sector banks on their capital requirements and growth plans for the next three to five years and preferred mode of capital infusion.
Sources said BoB, OBC and Dena preferred a direct capital infusion since their capital base is relatively low compared to their peers.
BoB has asked for a capital infusion of Rs 5,000 to Rs 6,000 crore and OBC and Dena asked for Rs 1,000 crore each.
If the government meets these requirements, its stake in BoB will increase to 64 per cent from 54 per cent, and to nearly 60 per cent for both OBC and Dena from 51.1 and 51.2 per cent, respectively.
One reason the government wants to increase its stake in these banks is to give them headroom to raise equity capital through public issues, which would have the effect of diluting the government's holding, at a later date.
Since the government's holding in public sector banks cannot fall below 51 per cent, these three banks do not have such head-room currently.
Most other banks in their presentations, however, asked for perpetual non-cumulative preference shares, since pure equity will expand their paid-up capital and lower earnings per share.
The paid-up capital of OBC and Dena Bank is among the lowest in the industry at Rs 250 crore and Rs 287 crore.
BoB's paid-up capital is at Rs 365.5 crore, much less than its peers like Bank of India (Rs 526 crore) and Union Bank of India (Rs 505 crore).
The price at which the government will buy the shares will be decided on the basis of the norms set by the Securities and Exchange Board of India.
For Rs 5,000 crore capital infusion, BoB will have to issue 100 million equity shares of a face value of Rs 10, assuming that the government buys the share at Rs 500 each. As a result, BoB's paid-up capital will increase by Rs 100 crore, which will still be lower than BoI and Union Bank of India.
In addition, these banks have expressed confidence that they can restore their present EPS within three to six months of the capital infusion.
BoB, for example, has projected 25 per cent growth in its business for the next three years and want to maintain a capital adequacy ratio of 14 per cent with 9 per cent tier-I capital. It expects to restore its present EPS by March, assuming that the capital from its promoter comes by December.
As a lesson from the global financial crisis, the government and the Indian banks realised the need for enhancing equity capital and most banks now prefer to have a capital adequacy ratio of 12 per cent, though the minimum regulatory requirement is only 9 per cent.
According to sources, the government has indicated that it may complete the capital infusion process by the end of December or early January, assuming funds from the World Bank for bank capitalisation comes in this month itself.
The World Bank recently granted a $2 billion loan for bank capitalisation in India and there are talks that it may grant another $1 billion for the same purpose.