FinMin to Allow RRBs to Raise Funds Via IPO, Rights Issue

The Finance Ministry has issued draft guidelines for Regional Rural Banks (RRBs) to raise resources from capital market, paving the way for raising funds via rights issue, private placement

The Finance Ministry has issued draft guidelines for Regional Rural Banks (RRBs) to raise resources from capital market, paving the way for raising funds via rights issue, private placement with select investors such as large banks and insurance companies, and initial public offerings (IPO).

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Current Situation:

Currently, there are 43 RRBs sponsored by 12 Scheduled Commercial Banks with 21,892 branches across the country. As at March 2022, RRBs had deposits and loans and advances (net) aggregating ₹5,62,538 crore and ₹3,42,479 crore, respectively. RRBs are jointly owned by the Government of India (GoI), the respective State Governments (SGs), and the Sponsor Banks (SBs), with equity contribution in the ratio (GoI: SG: SB :: 50:15:35).

The Guidelines:

As Per the guidelines, prior to issue of shares to the public through the IPO route, the RRBs should consider issue of bonus shares (to reward existing shareholders who so far have not been paid dividends and have first claim on the existing reserves) and a Rights Issue in consultation with the merchant bankers and the sponsor bank.
The ministry said ideally, the entire value of the issue may first be placed through rights offer with the provision to facilitate promoter shareholders to subscribe/renounce the offer. That part, of the proposed issue size still remaining unsubscribed may alone be taken forward for IPO based on the qauntum and merits, it added.
Depending on the size of the issue, a private placement for the sale of equity shares to a relatively small number of selected investors may also be considered by the RRB’s Board of Directors. Within this, the equity shares may be offered to large banks and insurance companies like LIC. Other private insurance companies, pension funds and mutual funds may be approached to subscribe in a book building process, per the ministry advisory.
The Department of Financial Service may consult the concerned State Government (SG) if the level of shareholding in the RRB of such SG can be reduced below 15 per cent (in compliance of the section 69 (b) of RRBs Act, 1976, after amendment).
While consulting, the SG may be advised the approximate amount of additional share capital contribution required to retain its share at 15 per cent and also the relevant timelines for subscription, the ministry said. The SG has to respond within 30 days from the date of receipt of the intimation.
Among the parameter for selection on RRBs for capital raising include: networth of at least ₹300 crore in each of the preceding three years; minimum Capital to Risk-weighted Assets Ratio above the regulatory requirement of 9 per cent in each of the preceding three years; track record of profitability – pre-tax operating profit of minimum ₹15 crore for at least three out of previous five years, excluding extraordinary times.
Further, RRBs should have return on equity of minimum 10 per cent in three out of preceding five years; and return on assets of minimum 0.5 per cent in three out of preceding five years. Also, RRBs should not have accumulated losses; be compliant with statutory norms of the Banking Regulation Act, 1949, and RBI Act, 1935; and they should not be under prompt corrective action by RBI/NABARD.