Bulk Sale of Axis Shares To Private Bank May Be A Zero Sum Game For Government

With just over 30 per cent shareholding, including shares held indirectly through government-owned financial institutions, Axis Bank is one of the jewels in the government’s crown. Little wonder, there was a feeding frenzy among all private sector bank when it was reported that Kotak Mahindra Bank had sounded the government on buying out the 11.56 per cent Axis Bank stake held by SUUTI (Specified Undertaking of the Unit Trust of India). The stake sale is supposed to be part of the government’s disinvestment proceeds.

As soon as this news was out, ICICI Bank and HDFC Bank are said to have told the government that any stake sale should be done through a formal bidding process. This means they may be interested in acquiring a minority stake. They can then opt for a full acquisition later through share swaps.

In an interview to The Economic Times, Aditya Puri, managing director of HDFC Bank, could not quite conceal his interest in buying Axis. Asked about his interest, he said: “At the moment, I am not in talks with Axis Bank. As far as the government is concerned, there is an established process. Obviously, as the 30 per cent shareholder, government will have a say, including whether they want a stock swap or a cash transaction.”

These are revealing words. While they do not confirm that HDFC Bank is interested in buying Axis, they do not by any stretch of imagination indicate indifference. The smart money would bet that many private banks, including HDFC Bank, ICICI Bank and Kotak Mahindra, may well seek to acquire it if they got the chance.

There are two issues worth noting here.

One, an auction is the best way to get a good price for the government. For example, at current prices, the 12 per cent Axis stake held by SUUTI could fetch the government around Rs 15,000 crore. A competitive bidding process could fetch even more.

Purely from a revenue-raising perspective, this makes better sense than divestment in phases through the markets, where the availability of a large quantity of shares tends to depress the price. A strategic sale with competitors bidding for those shares will get the best premium over market prices.

Since the government has a good quantity of shares in two other blue chips, including ITC (just over 11 per cent) and Larsen & Toubro (around 6.5 per cent), this should be the way to go. A competitive auction for ITC will fetch the government at least Rs 35,000 crore; a similar play with L&T will fetch it about Rs 9,000 crore.

However, there is a second point worth making when it comes to selling Axis this way. Unlike ITC or L&T, where the government will not have any problems no matter who acquires them. In the case of Axis Bank, it will end up strengthening already strong private sector banks. Nothing wrong with that, but if we juxtapose that with the reality that 70 per cent of the banking system is in the public sector, it spells disaster for the government’s holdings in them.

Private sector banks are already more nimble and profitable than public sector banks. The latter are overloaded with bad debts, and have poor market valuations. HDFC Bank, for example, is valued at Rs 356,000 crore, much more than State Bank of India at 214,000 crore (as on 8 March). If Axis Bank, currently valued at around Rs 120,000 crore, is acquired by another private bank, it would create another behemoth valued much higher than State Bank of India. That in itself is not the problem, but it is a zero-sum game for the government: what the private sector banking system gains will be the public sector’s loss, for the latter are simply not able to compete with the former. The swelling of values in the private banking industry will lead to a destruction of value in public sector banking – and these are taxpayer assets. A Rs 15,000-20,000 crore SUUTI sale gain will be more than matched by a value drop in public sector shares, especially the ones loaded with huge bad loans.

It is, of course, all right for the government to extract maximum value for its stake sale in Axis Bank, but it must also think strategically about public sector banks before it does that.

The sensible thing to do would be to start privatising public sector banks, but that requires changes in laws that may not pass in the Rajya Sabha, where the government does not have a majority. An alternative would be to legislate a golden share, where economic ownership of public sector banks is privatised, but the government retains enough voting shares that can be used in specific situations. The management can thus be privatised, but a fig leaf of government ownership will remain. This concept may be easier to sell to political parties than straightforward privatisation.

The lessons from private sector entry in industries that were earlier dominated by government are clear: the public sector almost always loses. In aviation, Air India is a sick bird. In telecom, BSNL and MTNL are also-rans, and the latter is a stretcher case.

(This article was first published in DB Post, in a slightly modified form)