The Union Cabinet today gave its approval for conversion of Perpetual Non-Cumulative Preference Shares (PNCPS) held by Government of India (GOI) in Indian Bank, UCO Bank and Vijaya Bank amounting to Rs.400 crore, Rs.1,823 crore and Rs.1,200 crore respectively into Equity Shares of these banks in favour of GOI, subject to approval of shareholders and also Securities and Exchange Board of India (SEBI) and other authorities.

Conversion of PNCPS subscribed by GOI in Indian Bank, UCO Bank and Vijaya Bank into equity shares in the first instance and subsequently in other Public Sector Banks where GOI has invested in PNCPS, PCPS and IDPIs, would enhance the Tier-1 capital of the PSBs thereby making available more funds at their disposal to meet the credit requirement of the productive sectors of economy. It will also provide impetus to the economy by including the under-banked rural and semi-urban areas.

The conversion is proposed to be done in the Financial Year 2013-14 subject to approval of shareholders and also the Securities and Exchange Board of India (SEBI) and other authorities.

Background:

Three PSBs namely, UCO Bank, Vijaya Bank and Indian Bank have requested for conversion of PNCPSs held by GOI into equity. The Reserve Bank of India (RBI) has been consulted in the matter. RBI, in its comments on the proposals, advised that the Government may consider permitting conversion of PNCPSs into equity subject to approval of shareholders and also Securities and Exchange Board of India (SEBI) and other authorities. After implementation of Basel-Ill norms, the thrust has been on equity capital in Tier- I capital of banks. Other instruments without loss absorption capacity do not qualify to be counted for Tier-l capital of banks. Non-equity instruments such as PNCPS, PCPS and IPDI do not qualify to be counted for Tier-l capital of the banks. The GOI has, in the past, infused capital by way of these instruments in the PSBs.

Conversion of preference shares into equity to bolster core capital of public sector banks, subject to shareholder and regulatory approvals. Conversion of Perpetual Non-Cumulative Preference Shares held by the central government in three public sector banks into equity is proposed, subject to shareholder and regulatory approvals. The conversion is intended to enhance Tier-1 capital by replacing non equity instruments lacking loss absorption capacity with equity, thereby increasing available funds for credit to productive sectors and supporting financial inclusion, with similar conversions to be considered for other banks where comparable instruments were issued.