Wednesday, January 9, 2008

FM told banks to refrain from going public about expansion plans

The state-owned banks have been warned by the government to exercise self-control before going public about their expansion or merger and acquisition plans.

Recently in meeting with CEOs of state-owned banks, finance minister P Chidambaram had told them that often bankers have been quoting in the media speaking about their acquisition and expansion plans. A banker who attended the meeting told that the bank chiefs have been told, as the government is the major shareholder, banks must get their plans approved by the government before making any public announcements. According to bankers, the comment from FM’s side had come because of recent developments.

In the recent case, SK Goel, chairman and managing director of Kolkata-based UCO Bank, had told the media that UCO will not acquire any banks, but will be merging with some other bank in three months. Indeed, several bank CEOs have quoted in the media about bank acquisition plans either in overseas or local markets.

Whereas some bank chiefs also have expressed their plans of counterfeit alliances with foreign partners in the asset management and insurance business. At the meeting convened by the finance ministry the warning to bankers formed part of the introductory remarks made by the FM to bank chiefs. The meeting was convened to review the six-monthly performance of banks in Delhi last week. The government’s equity holdings in state-owned banks range from 51% to 100 % in 28 such banks.

Bankers understood the FM’s message as an attempt to indicate that the “key shareholder has the right to know about the plans of banks as first-hand information rather than learning about it through the media”.

“Also, the FM may be trying to convey that there are so many announcements by bank chiefs without much action. It would be better if banks get the plan approved and implement it immediately,” said another banker. Sensitivity of the statements made by the bankers becomes point of worry as effect can be seen on account of sharp stock price movements.

Bankers said that while, at one point the government is talking about granting autonomy to state-owned banks, on the other hand, it is resorting to micro-management. This is most obvious in the fact that the FM himself urged banks to cut interest rates.

“Going by corporate governance norms, the government has its nominee on the board and as far as the board is kept informed it should be enough. There is no need to inform individual shareholder, be it a minority or a majority shareholder. Unfortunately, under the banking legislation, CMDs and EDs are appointed not by the board, but the government. And thus, the government emerges as the power centre,” said Hemindra Hazari, head of equity research, Karvy Stock Broking.

By the way, none of the banks that have expressed their plans to acquire a bank in the domestic market have obtained the approval from their boards. While within days of the warning from the government, the CMD of a large Bangalore-based bank quoted in public about the banks plan of acquisition possibility. The bank chief had added that he expects some action to take place this year.

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