State Bank of India to raise Rs 11,576 crore equity capital

State Bank of India has got government approval to raise equity capital Rs 11,576 crore in equity capital. SBI said that it will raise Rs 2,000 crore by way of a preferential equity issue to the government, which is its main shareholder, and also raise Rs 9,576 through a qualified institutional placement. The government’s approval is subject to its stake in the company not falling below 58%, from the current level of 62.3%.

The fund raising itself is not news but getting the government’s approval was a key step in the process. SBI had issued a notice to hold an extraordinary general meeting on December 30 for getting shareholder approval for these issues. The intention is to complete the capital raising by March 31, so that its net worth for the fiscal gets enhanced by this amount.

In its notice to shareholders, SBI had said November 29 will be the date for calculating the price at which the preferential allotment of shares to the government is done. The QIP approval is an enabling one and SBI has the option of doing it in tranches, possibly depending on market conditions.

SBI’s EGM notice talks about how it needs to comply with the Basel-III norms on capital adequacy ratios (CAR), and its CAR was 12.51% with common equity-tier 1 of 9.14%. That is very close to the CET-1 ratio of “at least 9% that is needed to maintain better ratings, to create the proposed counter cyclical buffer and to maintain a Leverage ratio, which is a measure of Tier 1 Capital to assets of 4.5%”.

SBI also needs its Tier I capital to increase so as to have enough headroom to grow its business. Its September quarter results show that its CAR is 11.69% while its Tier I figure is 8.73%. That is lower than the recommended figure, though the bank says that if it includes retained profits, then its CAR is 12.09% and its Tier I figure is 9.13%.
Therefore, this issue will ensure that its year end figure falls in line with the Basel III norms. While normal business growth is one reason, a rising non-performing asset situation exacerbates the situation. The equity issue is therefore very important to ensure that its year end CAR is in compliance with the Basel norms.

SBI’s EGM notice mentions that if November 28 had been the relevant date (using this as an illustration) then the government would subscribe to 1.15 crore new shares at a price of Rs 1782. If we take this as the final figure, for convenience sake, then the government’s stake increases to 62.9%. And if we take a price of Rs 1,889 a share for the QIP (taking the current price as a benchmark), then the government’s stake falls down to 58.6%. That is well within the limits set by the government. If SBI’s market price moves up further—it has risen by 7.8% in a month—then the dilution could be even less.

You can read the EGM notice here.

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