By IANS
New Delhi : The government Friday decided to enhance the capital of the State Bank of India (SBI) by subscribing to a rights issue of Rs.100 billion ($2.5 billion) to improve the performance and ratings of the country’s largest commercial bank.
The subscription will be against issue of marketable government securities and by creating a securities redemption fund by which these financial instruments will be redeemed on due date.
A meeting of the cabinet that gave its nod to the proposal, has left the actual number of shares to be subscribed, as also the coupon rate and tenure of the securities to be worked out by the finance ministry in consultation with SBI.
The timing of the issue will depend on market conditions and will be undertaken keeping in view the guidelines prescribed by the markets watchdog, Securities and Exchange Board of India, an official statement said.
The move will enable the government to receive Rs.13.58 billion as dividend and taxes from SBI in 2008-09, as against an expenditure of around Rs.7.9 billion as interest to be paid to the bank for the proposed securities.
In subsequent years, the government is likely to receive more revenue, estimated at Rs.15.52 billion in 2009-10 and Rs.18.92 billion in 2010-11, an official said after the cabinet meeting presided over by Prime Minister Manmohan Singh.
“The additional growth of the bank due to its increased capital base will also have multiplier effect on its overall performance, which will gain in terms of its position in the industry,” the official said.
The move will also help the bank’s ratings in both international and domestic markets, increase the valuations of its stock and boost the economy at large, the official added.
The transaction will be completed within the current financial year and the redemption fund will be created thereafter.