Putting market speculation of United Bank of India's (UBoI) merger with Union Bank of India at rest, UBoI has converted Rs 800 crore of bonds issued by the government into equity shares of Rs 10 each and another allotment of Rs 110 crore equity shares of Rs 10 each at a possible premia.
The bank on Monday informed the Bombay Stock Exchange that its board approved conversion of Rs 800 crore of perpetual non-convertible preference shares ( PNCPS) into equities and another issuance of Rs 110 crore of equity shares at a price yet to be decided to the government of India.
This, in effect, means the bank is still in the red, but has got a face-saving from insolvency as any follow-on public offer would have failed to evoke any response, bankers said.
Such perpetual bonds -- which were non-convertible till the UBoI's recent board approval – were issued by the government to its own banks to shore up Tier-I capital and improve capital adequacy. This is nothing but a financial jugglery of the government.
Typically, the government issues bonds to banks as it cannot issue equities but can only subscribe to them (shares) because it is not a company. These banks (the government-owned ones) then subscribe to the bonds, hence raising funds for the government. The government then re-directs the funds to the banks by subscribing to latter' new series of shares. Government banks are hence self-funding its own capital.
With the Basel III norms being implemented from April 2013, banks can no more classify perpetual bonds under Tier-I capital hence the government move to convert these (perpetual) bonds into equities now, senior bankers said.
The board's decision saw the share price of UBoI appreciating 5.94% to Rs 25.85 from its previous close of Rs 24.40.
The larger picture is still gloomy unless it shows sure signs of recovering its bad debts, which stand at Rs 8,546 crore, or 10.82% of its net advances. The losses in the second and third quarters were Rs 489 crore and Rs 1,238 crore, respectively, forcing the Reserve Bank of India to issue a cap of Rs 10 crore on loans to any single borrower account.
The latest move to convert bonds into equities has made the risk capital for the bank better. However, going by the norms laid out by the regulator, Securities Exchange Board of India (Sebi), the bank has been long due for de-listing. Going by the continuous listing norms of Sebi, promoter-holding should never exceed 75%, or in other words 25% of the shares should be available to non-promoters and public. If it does exceed the stipulated limit, then either promoters should sell their shares in the open market or get the company de-listed.
In the case of UBoI, the promoter, which is the government of India, has flouted its own rules initiated by the current President Pranab Mukherjee, then a finance minister, in his budget speech of 2009-10.
UBoI which was listed in February 2010 has always had government holding above 80%. The government currently enjoys 88% holding in the company, and with the new board approval the holding could well go over 90%, estimate bankers.