Bank Privatisation: Government Mulls Two Routes To Its End Goal

Vehicles travel on a near deserted highway in New Delhi. (Photographer: Anindito Mukherjee/Bloomberg)

Bank Privatisation: Government Mulls Two Routes To Its End Goal

As the government works towards privatising of public-sector banks, it’s toying with two possible routes towards that end goal. One that will need it to rally support of Parliament while opening up the possibility of broader privatisation down the road; the second may move things along quicker but allow only for case-by-case decisions.

The Department of Financial Services is currently looking into the process of divesting the government’s stake in public-sector banks, two people privy to the matter told BloombergQuint on the condition of anonymity.

Two options are being considered, these people said.

One option is to use an ordinance to shift just the lenders identified for privatisation outside of existing legislation, allowing for their privatisation. The second involves a broad-brush amendment to the laws implemented at the time of bank nationalisation, which would pave the way for more banks to be privatised eventually.

Finance Minister Nirmala Sitharaman in her Union Budget speech for 2021-22 said the government will privatise two state-run banks. Names of these banks have not yet been publicly disclosed. The government has already privatised IDBI Bank Ltd. by selling its majority stake to Life Insurance Corp. of India in 2019. It has also merged 14 state-run banks in the last four years.

Option 1:The Ordinance Route

Public sector banks are currently governed by the Banking Companies (Acquisition and Transfer of Undertakings ) Act, 1970. This act came into being after the government decided to nationalise 14 banks in July 1969 “to serve better the needs of development of the economy in conformity with national policy objectives”.

In April 1980, six more private banks were nationalised under the Banking Companies (Acquisition and Transfer of Undertakings ) Act, 1980.

State-run banks fall under these two legislations at present.

“These two laws converted the then private banks into government-owned public sector banks,” said Madhukar R Umarji, former chief legal advisor to the Indian Banks’ Association. Because nationalised banks fall under these two acts, Company Law doesn’t apply to them, he said. “Now, if you want to make public-sector banks companies again, you have to amend these acts.”

According to Umarji, the two acts include a list of banks which were converted into government-owned banks in a schedule. These banks ceased to be companies after the acts were passed.

One way is to say a specific bank ceases to be government-owned bank and will become a company due to an amendment to the act. Then they will have to comply with the provisions of the company law and can operate as a private sector bank.
Madhukar R Umarji, Former Chief Legal Advisor, Indian Banks’ Association

The amendments, Umarji explained, could be used to declare that the specified public sector banks shall be deemed to be registered under the Companies Act. After this, each lender will have to formulate their own rules and regulations to comply with the Company Law, he said.

At present, these banks don’t have their own Articles Of Association. What they have is the regulations framed by the government for the purpose of functioning as a bank. If these lenders are moved out of the existing Acts, they will have to formulate its own internal Articles of Association and also meet under requirements under Company Law, he said.

Should the government take this route, it will do so for the two specific banks it intends to privatise this year. Any broader move towards privatisation will then have to wait until later.

Also read: NITI Aayog Recommends One-Year Job Guarantee For Privatised Banks: BQ Exclusive

Option Two: Amend The Act

The second option is to go to Parliament and seek a broader change in these legislations, allowing the government to reduce its stake to below the currently prescribed 51%.

“The Central Government shall, at all times hold not less than fifty-one per cent. of the paid-up capital consisting of equity shares...” each of the two acts specify.

If the government chooses to amend this provision in its entirety, it will have to decide whether or not to introduce a new floor for shareholding in these lenders.

Former Finance Minister Yashwant Sinha, who in his Budget speech back in 2000-01 had proposed to reduce the government’s share in public-sector banks to 33%, said the matter should go through a full parliamentary process.

It shouldn’t be done by ordinance, Sinha told BloombergQuint.

It should be a proper legislation that should be brought before the Parliament. It should be referred to the committee concerned, which is the Standing Committee on Finance, and the committee should deliberate on it, it should prepare its recommendations, submit it to the Parliament and only then such an important Bill should be passed.
Yashwant Sinha, Former Finance Minister

DK Mittal, former banking secretary to the Government of India, is in favour of privatising a few banks, especially those that are “very local” in nature as most state-owned banks play a critical role in financial inclusion.

For such limited privatisation, either route could be considered, Mittal said.

“This is a political challenge on how to go about it. But, that is for the government to decide whether they want an amendment to the Act or an ordinance, both ways it is a change of law,” Mittal said. “An ordinance also ultimately goes to the Parliament for approval. If an amendment can be struck down by the Parliament, so can the ordinance.”

The Bigger Questions

Beyond the technicalities of the route taken to privatise nationalised banks, there are bigger questions for the government to answer as it moves towards undoing a more than 50-year-old legislation.

The government has to determine whether they want to bring down their stake in these banks either by selling shares in bulk to a strategic buyer or disposing them off to retail investors in the market to ensure wider shareholding, said Sinha, adding that he isn’t against the broad-based shareholding option.

Sinha said the traditional approach of not allowing corporate houses to own banks should be continued.

The extent of government control over these entities will also need to be discussed.

You will remember, way back when I was finance minister, I suggested that the government should be allowed to dispose off its shares and bring its shareholding down to 33%. But as per my proposal, we would have retained the power to appoint executive directors and chairman of public sector banks.
Yashwant Sinha, Former Finance Minister

Mittal said any broad-brush move towards privatisation should go alongside thinking on the role these lenders play in the economy.

“In a country like India, where there is so much inequality and poverty, public sector banks play a critical role. Financial inclusion happens in India only because of them and private sector banks’ contribution to financial inclusion is minimal,” he said. “In that scenario, if you are to privatise all public sector banks, that’s not correct but I don’t see a problem with privatising a few localised lenders.”

Both the former finance minister and the former banking secretary said some degree of employee protection would need to be provided.

BloombergQuint had earlier reported the Indian government’s think tank NITI Aayog has suggested that employees of nationalised banks put up for privatisation be given job protection for one year.

The bank employees’ associations are very important stakeholders in this and if they don’t like what the government is doing then it will lead to unrest among workers, said Sinha.

Mittal agreed that employees need to be taken aboard otherwise the buyer will not give you value. Ultimately, you have to include all your partners to get good value, he said.

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