dilution

courtesy of capital mind. a worthy primer on indian tarp. banks buy bonds that are recycled into equity and all shareholders are diluted to one degree or another

dilution

They’ll issue bonds. These bonds might have to be bought by banks. The banks will give money to the government which will turn around and buys shares in these banks. The banks get to keep the money; they get bonds and they issue shares in exchange.

This is interesting, because effectively the banks are giving their promoter (the government) money to buy their own shares

This is only good if banks actually recognize losses. If they continue to pretend-and-extend, all that this will do is to cause extreme inflation (as bank books will be bloated with capital, and not enough losses will have been taken and the situation continues).

For shareholders, we saw a bank with Rs. 100 book just get diluted by Rs. 50 from govt and Rs. 50 from private. If valued at 1x book, we have a 50% dilution.

This is similar to Indian banks. Andhra bank, by our estimates, will need about 7000 cr. of capital if they wrote off 60% of their net NPA. The problem? The market cap of ANDHRABANK is only 5200 cr. So if they get 7000 cr. of capital from the government, and issue shares at current prices, all current shares holders get diluted more than 50%! (If you held 1% of the bank earlier at Rs. 52 cr. and the bank saw Rs. 7000 cr. injected, you now own only 0.4% of the bank)

Oh, this will also increase govt. holdings – in Andhra Bank, for example, the government owns 70%. If they bought Rs. 7,000 cr. more then the govt will have 87%, if all if it is from the government. If you assume 75-25 dilution between public-private, that’s about 73%.