Kolkata: State-owned lenders Bank of India and Union Bank of IndiaNSE 2.21 % appear to have made arrangements with Canara BankNSE 0.11 % to provide collateral-free loans to their respective employees, a veiled move to fund purchase of shares under Employee Stock Purchase Scheme (ESPS).
Regulations do not allow banks to offer loans to their own employees for purchasing shares under ESPS. Both Bank of India and Union Bank of India have informally told their employees that they may take loans from Canara Bank should they want to purchase shares, two people familiar with the development told ET.
The move reflects the desperation by the lenders while several other state-owned banks had earlier faced lukewarm response on their ESPS amid their financial stress.
Bank of India even disbursed February staff salary in the mid of the month apparently to encourage employees buy shares. The BoI issue of Rs 10 crore equity shares opened on January 15 and closed Thursday. Canara launched the scheme for BoI employees in mid-January.
At Rs 80 per share, BoI was looking to raise up to Rs 800 crore. Union Bank looks to raise Rs 600 crore by issuing up to eight crore equity shares.
The loan – christened Special Canara Budget Scheme — is priced at 8.7% per year, which is the bank’s one year marginal cost based lending rate. This is significantly lower than the bank’s other personal loans under the “Budget Scheme” category for which the bank charges MCLR plus 4.30%.
The size of the loan was 10 months of employees’ gross salary subject to maximum of Rs 5 lakh. The Canara Bank scheme for BoI and Union Bank employees is for meeting personal and domestic needs while there was no mention of share purchase.
The scheme for Union Bank employees is valid up only up to March 8, 2019, suggesting it was tailored for a specific purpose.
Mails sent to both BoI and Union Bank seeking comments on the development remained unanswered till the time of going to press. A Canara Bank executive said the Budget Scheme is for salaried employees and the same is extended to employees of the two banks. “These are personal loans and customers are free to use for any purpose,” he said.
ESPS is a way of diluting government’s shareholding in state-owned banks as these lenders are mandated to increase public shareholding to a minimum 75% under market rules governed by regulator Securities & Exchange Board of India.
Earlier, banks such as Allahabad Bank and United Bank of India saw tepid response from their employees while Indian Overseas Bank and Punjab National Bank saw staff better participation.
United Bank’s Rs 50 crore ESPS was subscribed 65% even after several extensions of deadline, while Allahabad Bank managed to raise around Rs 236 crore against the target of Rs 270 crore.
PNB’s scheme Rs 500 crore was subscribed 91% while IOB issue was fully subscribed.