Bargain basement sale of bank stocks: most unwise

By C. R. L. Narasimhan

That the latest public sector bank (PSB) listing on the stock market, that of Vijaya Bank's, will start at a discount is not surprising. The bank had made a Rs. 100 crore public issue at par only last month. On January 10 it made an unimpressive debut on stock exchanges, with its first day quote closing below Rs. 10. Two other PSBs - Syndicate Bank and Indian Overseas Bank - are also trading below their issue prices of Rs. 10. Earlier, PSB issues such as Bank of Baroda, Bank of India and Corporation Bank were issued at higher prices, above the then ``par values'' of Rs. 10. BOB and BOI are trading way below their offer prices. In a psychological sense that is somehow less embarrassing than when a Rs. 10 share falls below par and into a single digit. However, investors suffer loss in both cases. The market's rejection of public sector financial stocks is complete. India's leading development financial institution, IDBI, issued its shares at Rs. 130. It is now trading at Rs. 47.50. (IDBI recently announced a three for five bonus to ``compensate'' those who subscribed to its IPO. Yet the share has not perked up).

There is something innately distressing to see a Government owned bank's share being discounted so soon by the market. After all, all these issues got full subscription at the time of their IPOs.

May be the banks persuaded their clientele, sometimes even coerced them into applying but this does not detract from the fact that many genuine - the proverbial small - investors had also applied. And now quickly disillusioned. For the public sector banking stocks in their entirety these have not been the best of times as far as the market is concerned. Even the mighty State Bank of India is quoting at a PE multiple of 4.7, Corporation Bank at 4.5 and BOB at 2.7. In contrast HDFC Bank trades at a PE of 22.4 and ICICI Bank at 34.3. These two are the only bright spots in an otherwise grim picture of banking stocks.

Extremely short-sighted

In both these cases there is an identification with technology and that has lifted the valuation. Besides, the ownership pattern has a bearing with the PSB shares, as a class, faring worse than the rest.

The above data can be interpreted in many ways. The Government that has espoused a capital market approach for the PSBs needs to be concerned especially. Large-scale sale of PSB stocks is on the cards once the legislative approval for reducing the Government's minimum stake in 19 PSBs is obtained. Not only the relatively weak PSBs but even the stronger ones such as Bank of Baroda stand to suffer. There is no way even the latter category can make a fresh share issue at the price they issued the first time. In short, no more ``premium'' days. As for the weaker PSBs it seems cruel to burden lay investors with stocks that will automatically quote at a discount. In fact, the sentiment is so strongly against these stocks that any further addition to their numbers on the stock exchanges may further pull down their cumulative valuation. And obviously the greatest loss is to the present owner, the Government.

The banking policy since nationalisation has sought to impose uniformity across all PSBs, trying to treat them as homogeneous. Nowhere else was the fallacy so evident as in the creation of uniform salary and service conditions. To an extent this is being remedied by allowing bank managements to decide on issues such as the voluntary retirement scheme. But forcing all banks to go to the market for augmenting their capital or for any other reason is extremely short-sighted. There is a need to differentiate between banks and also recognise that a pure stock market route cannot be a uniform or the only solution. From a macro-economic point of view selling public sector stocks at rock-bottom prices is disastrous and involves a perverse transfer of resources from the Exchequer to the private sector.

Discrimination the cause

What then is the solution? As a general statement it will be valid to say that PSBs have a negative image out of proportion to their actual performance and position in the economy. Much can be written on this but the fact remains that no public sector bank, including SBI, has been prepared for the market.

In the matter of image building all the Government owned banks lag far behind most of their private counterparts.

The key is to unlock the public sector banks' strengths. As stock markets are driven by perception, there ought to be a crash programme to boost the image of the PSBs. A starting point of this exercise ought to begin with a move to reduce government control before their stocks are put up for sale. The Government itself has shown scant regard for the image of the PSBs, treating them most discriminately. Take the much abused concept, vigilance administration. Why should there be a vigilance scare only among government-owned bank employees?

Till date the Central Vigilance Commissioner has no statutory authority over public sector employees. Very few bankers will publicly admit this but even the advisory role has been highly detrimental to the banks and their images. Only one senior banker - the former SBI Chairman, Mr. G. G. Vaidya - had called (at the bank's last annual meeting) for doing away with the existing vigilance apparatus.

Almost all other senior executives of PSBs are convinced but are emphatic only in private. From the corporate governance angle too it is time that the banks' boards rather than outside agencies be called upon to decide on matters including vigilance.

Much more can be written on the discrimination under which the PSBs and their shares languish. It is, therefore, intriguing as to why the Government and the Reserve Bank of India should allow banks such as IOB and Vijaya Bank to access the capital market with all their structural deficiencies in tact.

Selling public sector stocks at rock-bottom prices involves a perverse transfer of resources from tax-payers to the private sector.

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