Indian Bank and Central Bank of India are planning initial public offerings (IPO)

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Indian Bank and Central Bank of India are planning initial public offerings (IPO).

A slew of equity issues by Indian banks is set to hit the market in the next six months as banks seek more capital to expand business, but regulatory changes are needed to ensure longer term capital needs are met, analysts say.

At least four listed state-run banks have said they plan to raise capital soon.

Punjab National Bank is planning to issue up to 50 million shares, Dena Bank will offer 80 million shares, Bank of India is planning a 100-million share issue and Bank of Baroda has yet to detail its plans. None have been priced so far.

Officials at India's third-largest bank by market value, privately managed HDFC Bank Ltd., say it will need more capital in 6-12 months if it maintains recent growth rates.

Meanwhile, state-run Indian Bank and Central Bank of India are reported to be planning initial public offerings.

With bank lending on the rise in a strong economy, banks need to boost capital to meet the central bank's capital reserve requirement of nine percent, which broadly means they need to set aside nine rupees as capital for every 100 rupees of loans.

Banks' loans grew 8 percent to 9.08 trillion between April 1 and August 27 as India's economy continued to expand. Asia's fourth largest economy is expected to grow at least 6.0 percent in the fiscal year to March 2005, sharply down from 8.2 percent a year earlier, but still a healthy clip by global standards.

"Basically, banks need more capital as their lending is increasing," said Jinesh Gopani, banking analyst at Emkay Shares.

Gopani said another reason for banks to tap capital markets is to offset any loss in earnings from trading profits. Strong gains from bond trading helped banks post sharp earnings growth in the past three fiscal years, adding to reserves used in calculating capital adequacy.

But treasury income has been falling this year as bond yields have risen.

"Markets are flush with liquidity (funds) now so public issues should have no trouble getting subscribed," he said.

CAPITAL NEEDS

Speakers at a banking seminar in Bombay earlier this month estimated that Indian banks could need up to $20 billion in additional capital within a few years to take care of business expansion as well as the Basel requirements.

Analysts say this level of capital can be raised only if foreign investors are drawn into the country. But this is unlikely until clear-cut guidelines on foreign investment are laid down.

Currently, foreign stakes in a state-run bank cannot exceed 20 percent of its paid-up capital whether through direct or portfolio investments.

For private banks, the cap is set at 74 percent, but analysts say investors are awaiting final guidelines from the central bank, which recently issued a draft proposing that no individual or related group could own more than 10 percent of a bank's equity.

LEGAL CHANGES

Some state-run banks could also face problems in raising capital in future unless the government amends laws on ownership.

Current laws require the government to hold a minimum 51-percent stake in state-owned banks. The previous government had announced plans to cut this limit to 33 percent, but it was voted out earlier this year by a communist-backed Congress alliance.

The communists have said they will oppose moves to privatise state-run banks and have objected to any lowering of the 51-percent limit.

The government's stake in four of the 10 state-owned banks in the 16-bank Bombay Stock Exchange banking index is already down to 63 percent or less, restricting the scope for fresh share issues or stake sales.

The central bank owns about 60 percent in the State Bank of India, the country's largest commercial bank, while the state government of Jammu and Kashmir holds a 53-percent stake in The Jammu and Kashmir Bank Ltd.

One option could be through the issue of preference shares, which do not confer voting rights to the holders and will not dilute earnings or existing shareholders' stakes. A senior central bank official said on Thursday the regulator was considering allowing banks to issue preference shares.
 

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