Last December, HSBC announced that it would buy a 14.6% stake in UTI Bank, a profitable private bank, from Actis, a UK private equity firm, with an option to buy another 5.4% once the regulators cleared the purchase.
Had HSBC acquired the entire 20% Actis stake, it would have had to make a general offer to buy another 20% from UTI Bank’s shareholders, and could have emerged as UTI Bank’s single largest shareholder.
Banking sources said that HSBC’s purchase was trimmed to keep it from acquiring a controlling interest in UTI Bank, which is controlled by three state-owned institutions.
HSBC will not have a seat on the bank’s board as Actis did. It will also require an approval from the regulator for any fresh purchases of UTI Bank shares by its subsidiaries and for any move with regard to UTI Bank that might be construed as strategic in intent.
Brushing aside any suggestion of disappointment, HSBC India CEO Niall Booker said that the purchase of UTI Bank shares is a “financial investment” for HSBC in a dynamic, growing economy. HSBC is focused on organic growth in India for the present and is waiting for new rules that will allow foreign banks to incorporate subsidiaries in India, he added.
HSBC has already made a tidy profit on the UTI Bank investment and is free to sell the shares if it so wishes.
The central bank’s move to curtail HSBC’s purchase comes at a time when the installation of a new Congress-led coalition government in New Delhi in May has caused speculation over the future direction of banking reform.
The new government favours foreign direct investment in greenfield ventures rather than the takeover of existing companies and says it will not privatise profitable state companies. A major cause for the defeat of the previous government is that it failed to focus on the needs of the agricultural sector, which supports most of India’s poor. Finance minister P Chidambaram has ruled out privatisation of public sector banks for now, and announced that farm credit will be doubled in the next three years.
On June 18, he announced a package to expand agricultural loans by 30% to Rs1045bn ($23bn) this fiscal year and to restructure existing farm loans to unclog the delivery of credit to farmers.
Analysts say the burden of restructuring loans will be borne by the banks, particularly the major lenders, the state banks, and not the government’s budget. Mandated lending is likely to back in focus.
Already around 40% of bank loans must go to ‘mandated sectors’ such as agriculture (18% of net bank credit) and small businesses. Foreign and private banks that do not have the network in rural areas must invest in bonds of rural financial institutions.
