Govt seeks to cut stake in State Bank to 51 pct

New Delhi: The government is seeking legislative approval to sell down its stake in top lender State Bank of India to 51 percent, which could raise about $2.5 billion, a quarter of what the bank needs to grow over the next five years.

On Monday, Finance Minister Pranab Mukherjee introduced a bill in the lower house of parliament seeking approval for cutting the government's stake in SBI, and for the bank to raise capital by issuing shares or through a rights issue.

"This is an operational matter to see that SBI does not face capital constraints as the economy grows over 8 percent, resulting in lending growth rates rising at 25 percent or above," Ananda Bhowmick, an analyst at Fitch Ratings, said.

SBI has said it plans to raise $4.3 billion through a rights issue in 2010/11, half of its requirement to sustain growth over the next five years with Asia's third largest economy poised to expand at 8 to 9 percent in coming years.

The federal government, which owns 59.41 percent of SBI, can bring its holding down to 55 percent under current rules. Selling the stake all the way down to 51 percent would generate $2.5 billion at SBI's current market price.

Shares in SBI extended gains to 3.3 percent after the news, before closing 1.2 percent higher at 2,070.25 rupees, outpacing the broader market's 0.64 percent rise and a tad over the 1.1 percent uptick in the sector index.

SBI raised $4 billion in 2008 through a rights issue with the government issuing bonds to the bank in lieu of cash. With a 16-year high fiscal deficit that India is committed to cut, a repeat of this move is unlikely, analysts said.

India has said it plans to bring down its holdings in banks but would keep majority control, a plan that has faced political and union opposition.

India is in the process of selling partial stakes in roughly 60 government firms as part of an effort to close its fiscal deficit and make state enterprises more competitive. It aims to raise about $8.6 billion through such selldowns in the fiscal year that begins on April 1.