Public sector banks have found a way to resolve the contentious issue of returning capital to the government.

They have sent a proposal to the Centre suggesting that they offer the government's equity for sale to the public.

In other words, the public sector banks, which have already come out with initial public offerings (IPO), now want the government to divest its stake in the market to get a premium.

Analysts said the government, enthused by the Maruti IPO, might bite the bullet and enter the market to offload its stakes to the public.

Sources in the know of developments said if the government was unhappy with this proposal, some banks were ready to have a second round of public issues for small amounts and the price of the issue could be the benchmark for returning the government's equity.

A few banks have explored the possibility of coming out with rights issues to prop up their capital base, but the provisions of the Banking Regulation Act are not clear on this and some amendments to it are required to allow banks to float rights issues.

"If the government divests its stake to the public, it can claim a premium that is dictated by the market. Banks will have nothing to do with this as it will come from the public," said a senior banker.

However, if the government takes this route, the banks will not be able to pare their capital base and improve their valuations in terms of better earnings per share (EPS) and book value.

If the second proposal finds favour with the government, the banks can bring down their capital base.

The finance ministry has not yet made its stand clear on the part-buyback of the government's stake from the public sector banks even as the Securities and Exchange Board of India (Sebi) is investigating the rise in prices of bank stocks.

The matter has been referred by the finance ministry to the parliamentary standing committee on finance.

Sources said depending on the decision of the committee, individual bank boards would have to review their decisions on this matter.

Settlement solution

• Government likely to accept banks' proposal
• Some banks ready for second round of issues for small amounts
• Price of these issues could be benchmark for returning government stake