Milestone in Indian Government's support to IDBI.

MUMBAI: The government’s stake in IDBI is expected to go up to 65% by the end of the second quarter to September 2010, following a Rs 3,110-crore capital infusion into the bank. The government, which currently holds a 52.67% stake in the bank, will infuse the capital through a preferential allotment.

Officials from IDBI said that the bank would make a preferential allotment of shares to the government like any company does to its promoters.

“The allotment will be in line with the prevailing share price and the process may be completed by the second quarter of this year,” said IDBI officials. The proposal to infuse capital will require shareholders approval and is part of the agenda in the forthcoming annual general meeting, which will be held on July 22.

Last week, the government had said that it would infuse Rs 6,211-crore capital into PSU banks, including Rs 3,110 crore in IDBI Bank, Rs 590 crore in Bank of Maharashtra, Rs 2016 crore in Central Bank of India, Rs 375 crore in UCO Bank and Rs 111 crore in Union Bank of India.

Increased government equity stake will help these banks raise money from the capital market through a follow-on public offer. As of now, no PSU bank can dilute government stake below 51%. So far, this has made it difficult for IDBI to raise money from the capital market, as government stake was close to 52%.

Secondly, any fresh capital infusion will also increase IDBI’s tier-I capital to over 8%. The bank’s tier-I capital, which comprises equity and reserves, was at 6.23% as on March 10. A higher tier-I capital will enable bank to lend more and also enable them to raise more money in the form of tier-II capital (subordinated debt). There is restriction on the amount that a bank can raise as tier-II capital. A bank’s tier-II can’t be more than half of its tier-I capital.

IDBI had posted a net profit of Rs 1,031 crore for the year ended March 10, compared to Rs 858 crore in March ’09. The shares of the bank closed at Rs 117.75 against the previous day’s close of Rs 118.50.

The capital infusion by the government will also aid IDBI Bank on its expansion. The bank, whose operations are largely domestic, has plans to expand its international presence. Earlier this month, IDBI opened its first overseas branch at the Dubai International Financial Centre (DIFC).

The branch will provide a full range of corporate banking services, including financial advisory and syndication of credit. Speaking at the launch, BP Singh, deputy managing director, IDBI Bank, said that apart from being a hub for the bank’s regional operations, the DIFC branch will also serve as IDBI Bank’s nodal point for raising foreign currency resources from the US and European markets in addition to Asian markets.