United Bank of India said its board of directors has approved in principle a plan to raise ‘up to Rs 3,000’ cr via a preferential sales of shares ahead of its merger with two other banks.
A preferential sale of shares, as distinct from a private placement, is a quicker form of selling shares to raise money. Unlike a private placement, preferential allotments do not require the company to come out with an offer letter that lays down the conditions of the sale and so on.
United Bank of India, abbreviated as UBI, said the board has approved the sale of new shares to the government of India and any ‘select person or group of persons, including institutions like Life Insurance Corporation of India’ and ‘any such other institutions’ for an amount aggregating up to Rs 3,000 cr.
The plan will be put to shareholder approval by postal ballot.
The move comes ahead of a planned merger of the bank with two other taxpayer-funded banks, Punjab National Bank and Oriental Bank of Commerce.
The three-way merger is part of a broader plan announced by the government to bring together 10 state-run banks into four entities.
Other banks being merged are Canara Bank with Syndicate Bank and Union Bank with Andhra Bank and Corporation Bank.
The merger of United Bank with PNB and OBC will be completed by the end of the current financial year, creating India’s second biggest taxpayer-funded bank.
India’s public sector banks have become a major liability for the taxpayer due to their tendency to advance loans that are not paid back.
According to a recent report by Assocham and Crisil, total bad loans with Indian banks were at a whopping Rs 9.4 lakh cr, compared to the size of the Indian economy at just Rs 2.4 trillion.
Out of this, power, infrastructure and steel sectors together constitute about half of Rs 4.1 lakh crore.
The government has been putting in trillions of rupees of tax money into these banks to help them remain afloat after the loans they advance routinely turn bad.
The situation has led to much disquiet among economists and citizens, leading the present government to explore various options to make the banks more efficient, less corrupt and more profitable.
After the latest round of mergers, the total number of taxpayer-funded banks will come down to 12 from 27 two years ago.
These banks, which were mostly started and managed by private persons, were seized by Indira Gandhi as part of her plans to turn India into a socialist republic in the 70s and 80s.