RRB IPO: Government frames rules, tells sponsor banks to identify eligible RRBs

The government said that regional rural banks need to have at least Rs 300 crore net worth for the past three consecutive years if they plan to raise capital through initial public offerings. These banks would also need to have their capital adequacy above the regulatory minimum level of 9% for them to access the capital market.

In the draft capital raising guidelines for RRBs’ capital raising, communicated on Wednesday, the ministry of finance told the sponsor banks to identify

eligible RRBs.

At present, there are 43 RRBs sponsored by a dozen commercial banks. The Regional Rural Bank Amendment Act, 2015 enabled these banks to access the capital market outside their present shareholders – the government, sponsor banks and respective state governments — which hold shares in each RRB in the ratio of 50:35:15.

However, no RRB accessed the capital market so far.

“Listing of the RRBs will provide liquidity, marketability and visibility along with the ability to raise capital in the future,” the ministry of finance said in its communication to heads of RRBs and their sponsor banks on Wednesday.

The government suggested that no banks with accumulated losses should go for IPO. These banks should have a minimum Rs 15 crore operating profit for at least three years in the past five years with a 10% return on equity and 0.5% return on assets.

The government said that these banks should prepare a three-year capital roadmap as part of the capital raising plan.

It also suggested that before raising capital through IPO, RRBs should consider the issue of bonus shares and a rights issue to the existing shareholders.

Issue of bonus shares would reward the existing shareholders who so far have not received any dividend while having the first claim on the existing reserves. Issuance of bonus shares would bring down the price of the scrip, specifically for those RRBs who are carrying disproportionate reserves against equity.

The RRBs are also allowed to raise capital by placing shares with large banks, state-owned insurance companies, including

, other private insurers, pension funds and mutual funds through book building.

As an additional option to raise regulatory capital, the Reserve Bank of India already allowed RRBs to issue perpetual debt instruments and made such instruments eligible for inclusion as additional tier 1 capital, subject to certain limits.