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FinMin to allow RRBs to raise funds via IPO, rights issue

FinMin to allow RRBs to raise funds via IPO, rights issue: Draft guidelines for Regional Rural Banks (RRBs) to raise capital from the capital market have been released by the Finance Ministry, opening the door for raising capital through rights issues, private placements with a selected group of investors, like major banks and insurance companies, and initial public offerings (IPO).

FinMin to allow RRBs to raise funds via IPO, rights issue: Key Points

  • The government has issued a thorough model of guidelines for Regional Rural Banks (RRBs) to acquire capital and put the responsibility on sponsor banks to select suitable RRBs.
  • There are currently 43 RRBs around the nation, sponsored by 12 Scheduled Commercial Banks, with 21,892 branches. Deposits and loans and advances (net) held by RRBs as of March 2022 totaled $5,62,538 crore and $3,42,479 crore, respectively.
  • The Government of India (GoI), the respective State Governments (SGs), and the Sponsor Banks (SBs) jointly own RRBs, with equity contribution in the ratio GoI: SG: SB:: 50:15:35.

Guidelines

  • In accordance with the guidelines, the RRBs should consider issuing bonus shares (to reward current shareholders who have not yet received dividend payments and have the first claim on the existing reserves) and a Rights Issue in consultation with merchant bankers and the sponsor bank before issuing shares to the public through the IPO route.
  • As per the ministry, ideally, the entire value of the issue should be put through a rights offer, with the provision allowing promoter shareholders to subscribe or renounce the offer.
  • That portion of the proposed issue size that remains unsubscribed may be taken forward for IPO on its own merits.
  • The RRB’s Board of Directors may also take into consideration a private placement for the sale of equity shares to a relatively small number of chosen investors, depending on the size of the issue.
  • Within this, the equity shares can be made available to significant banks and insurers like LIC. According to the ministry’s advice, other private insurance companies, pension funds, and mutual funds may be contacted to subscribe to a book-building process.
  • If the shareholding level of the concerned State Government (SG) in the RRB gets decreased to 15% (by section 69(b) of the RRBs Act, 1976, after amendment), the Department of Financial Service may consult the concerned State Government.
  • According to the government, while consulting, the SG might be given information on the approximate additional share capital contribution needed to keep its ownership at 15% as well as the relevant deadlines for a subscription. Within 30 days of receiving the notification, the SG must react.
  • The following criteria are used to select RRBs for capital raising: net worth of at least 300 crores in each of the last three years; a minimum Capital to Risk-weighted Assets Ratio above the regulatory requirement of 9% in each of the last three years; and a track record of profitability with a pre-tax operating profit of at least 15 crores for at least three of the last five years, excluding exceptional circumstances.
  • Also, RRBs must have a minimum return on equity of 10% in three of the previous five years and a minimum return on assets of 0.5% in the same three years.
  • Moreover, RRBs should not have any accumulated losses, conform to the Banking Regulation Act of 1949 and the RBI Act of 1935, and not be subject to immediate corrective action by the RBI or NABARD.
  • As stated by the ministry, the listing of RRBs will increase their liquidity, marketability, visibility, and capacity for future capital raising.

What is IPO?

  • Initial Public Offering is the selling of securities to the public in the primary market. It is the method by which a privately held corporation or a government-owned company raises capital by selling shares to the general public or new investors.
  • The company is listed on the stock exchange following the IPO. A stock exchange is a market for the purchase and sale of securities such as shares, stocks, and bonds.
  • A listed company can raise share capital for future growth and expansion via a follow-on public offering, or FPO.
  • The company must register its offer document with the market regulator Securities and Exchange Board of India(SEBI) while launching an IPO.
  • Benefits:
    • An IPO opens the path for the issuer’s securities to be listed and traded on the stock exchange market.
    • The corporation can invest in new infrastructure and capital equipment with the help of the money acquired by the IPO.
    • Due to the ability to grant stock options to its employees, the IPO also enables the business to draw in top talent. As a result, the business can initially pay its leaders reasonably minimal salaries. And in return, as promised, the staff can later cash out via the IPO.
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