Banking Privatization Amendment Bill likely in Winter Session

Banking Privatization Amendment Bill likely in Winter Session

by 5paisa Research Team Last Updated: Dec 12, 2022 - 03:39 pm 45k Views

The announcement to go ahead with privatization of PSU banks was made in the Union Budget 2021. During the budget presentation, Finance Minister Nirmala Sitharaman had committed that 2 PSU banks, other than IDBI Bank, would be privatized during the year.

The Winter Session is the last session of the house before the next budget is presented on 01-Feb 2022, so it is a logical assumption that Banking Privatization Bill will be taken up.

On 24th November, the stock prices of 2 PSU banks viz. Indian Overseas Bank and Central Bank of India, had rallied sharply on expectations that they may be in the queue for privatization in this year. However, both the banks have denied of any such development.

However, this has raised hopes that the government would take up the Banking Privatization Amendment Bill in the current Winter Session. The Winter Session begins on 29th November and ends on 23rd December.

The privatization of PSU banks will require amendments to two existing legislations viz. Bank Companies (Acquisitions and Transfer of Undertakings) Act 1970 and of 1980. These were the legislations that had resulted in the nationalization of Indian banks in 2 tranches.

Since these Acts are currently still in operation, privatization of the PSU banks will be a reversal of the provisions of these Act and hence will require to be appropriately amended.

While IDBI Bank has already been identified as a case study for privatization, the market reports indicate that Central Bank of India and Indian Overseas Bank could be the other 2 additions in this year.

The privatization initiative is relevant because it entails the government reducing its stake in these PSU banks to below 51% and effectively ceding control over these banks to private parties.

The privatization bill will have to go a lot beyond selling out. It also assumes a legal framework for privatization that will usher in corporate governance and bring about greater shareholder accountability.
It will also reduce the number of government nominees on the boards of these banks as well as give greater freedom to the private sector in decisions pertaining to capital allocation, asset quality management and managerial compensation.

The privatization of banks will have multiple benefits. Firstly, it will help them bridge their disinvestment target of Rs.175,000 crore this year. But more important it reduces the government bleeding on capital infusion.

In the last decade, the government has infused Rs.250,000 crore as bank capital and lost another Rs.130,000 crore as notional loss on shareholding value. That is something that can really be avoided with privatization of banks.

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