NEW DELHI: The finance ministry has proposed an ambitious road map to create a holding company to park government-held stakes in public sector banks valued at about Rs 2.5 lakh crore, which in turn will raise long-term funds and use that to capitalise the lenders. The holding company (holdco) will raise funds through debt and equity route over the period that will be used to meet the fund requirements of capital-starved public sector banks.

The finance ministry estimates these banks would need about Rs 1.25-1.5 lakh crore over the next five years to meet Basel III norms and fund future growth plans. In a detailed presentation to new finance minister Arun Jaitley, finance ministry mandarins suggested the move to create a long-term solution to finance the banks. This necessitates the repeal of the nationalised bank status under which these lenders are constituted, and would also require the transfer of power from the government to the holdco through a suitable agreement and relevant memorandum and article of association.

“The proposed holdco will act as sovereign fund for the financial sector and will help in infusing capital to the banks in future. The proposed structure will help the government in retaining its voting right to above 51 per cent in these banks while its (government’s) economic interest will come down over the period,” according to a person familiar with the presentation.

Earlier this month, the PJ Nayak Committee recommended the creation of a Banking Investment Company. “While the Banking Investment Company would be constituted as a core investment company under RBI registration and regulation, the character of its business would make it resemble a passive sovereign wealth fund for the government’s banks,” according to the report of the committee.

The government and the holdco will enter into a shareholder agreement which will ensure the holdco has autonomy over its operations and sets its objective in terms of financial returns from the banks it controls. Following the legislative amendments that will be needed to repeal the act through which public sector banks have constituted as statutory bodies, the ownership function of these banks will be taken over by the holdco from the government.

Currently, the government owns between 58 per cent and 88 per cent equity in all the state-run banks. As per the current share price on BSE, the combined market capital of these 21 banks is a little more than Rs 4 lakh crore and the value of the government’s holdings in these banks isRs 2.5 lakh crore. “Against the underlying asset of over Rs 2.5 lakh crore, the holdco can raise long-term debt in the initial period that will be used for capital infusion in these banks. In return, the holdco will meet the expenses from the dividend inscome it will receive from these banks,” said a person familiar with the presentation.

Over the period, the holdco will be listed on bourses and raise a substantial amount to fund the future growth of these banks, he added. In addition, the ministry is also suggesting that banks be allowed to issue non-voting shares or shares with differential voting rights as this will help the government in retaining majority control.