The government has begun inter-ministerial consultations to draught the required legislative changes to privatise public sector banks (PSBs). Official sources state that the idea is to decide to amend the applicable laws in one go so that legal barriers do not obstruct the privatisation of PSBs.
The government is debating repealing the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980. (nationalization Acts). According to the sources, one of the main constraints found is a voting rights limit of 10% for a non-government shareholder regardless of shareholding.
The requirement in the Banking Regulation Act of 1949 that no shareholder of a banking company – PSB or private sector bank – exercise more than 26 per cent voting rights is also being checked, they add.
Finance Minister Nirmala Sitharaman revealed the government’s intention to privatise two PSBs and one general insurance firm in the current fiscal year in her Budget FY22 address. This is seen as part of a more extensive process to privatise more PSBs. While the Niti Aayog has listed a few PSB candidates for privatisation, the RBI and the government are in talks to privatise the two banks this year.
According to the sources, before repealing the bank nationalisation laws, transitioning PSBs from these Acts to the Companies Act must be created. This is being researched as a precedent. Other corporations have moved from other Acts to the Companies Act, but no nationalised company has done so yet.
There were 5-6 banks that were govt-owned at one point but were not nationalised, including Axis Bank, Private, and IDBI Bank. As a result, their privatisation went reasonably smoothly. Following consultations and the solicitation of legal advice, legislative action on nationalisation acts and banking regulation acts is required during the monsoon session of Parliament.
Between FY15 and FY20, the Centre was required to inject up to Rs 3.2 lakh crore to shore up the capital base of the bad loan-ridden PSBs.
Nonetheless, long before the Covid-19 pandemic, their market capitalisation had been slowly and significantly eroding in recent years.