State-owned banks that are hitting the capital markets are citing the government as a risk factor.

If this sounds preposterous, look at the prospectuses of banks that are planning public issues: they all talk about restrictions on investors' rights and banks' operations.

These flow from the government's not having amended the Bank Nationalisation Act and the Banking Regulations Act.

The Bank Nationalisation Act, 1970, which was amended in 1994, enabled banks to go public (to raise capital). But it curtails shareholders' rights.

In the case of companies, dividends are recommended or proposed by the board of directors and declared at annual general meetings.

In the case of public sector banks, the boards declare dividends and the shareholders have no role to play in this.

Shareholders of listed public sector banks are only permitted to discuss the annual reports at the annual general meetings; in contrast, the annual reports of companies are adopted by shareholders.

Other 'risks' for public sector bank shareholders are: the financial disclosures in the offer document may not be available to them after listing on a continuous basis; they also do not have the right to call for general meetings, inspect minutes and other material records and seek voluntary winding up; and no shareholder other than the government is entitled to exercise voting rights in excess of 1 per cent, irrespective of his holding in the bank.

There are other obstacles, too, at the operational level. For instance, banks can carry on business only as specified in the Banking Regulation Act.

They do not have the flexibility to pursue other profitable avenues, even if they arise. In contrast, shareholders of companies, which are governed by the Companies Act, can amend the objects clause by a special resolution.

Similarly, in terms of Section 8 of  the Banking Regulation Act, a bank is prohibited from trading, which may act as an operational constraint.

Among other operational constraints, banks cannot issue bonus and rights shares without the approval of the ministry of finance; in terms of Section 8 of the Banking Regulation Act, every bank is required to create a reserve fund and transfer 25 per cent  of its net profit to the fund before declaring any dividend.

The Indian Banks' Association has constituted a legal committee to look into the general regulations on dividend, directors' responsibility statement, voting rights, issue of employees stock option plans, general meetings and their conduct and buy-backs.

Once listed, the public sector banks are governed, apart from the principal regulator, the Reserve Bank of India, by the stock exchanges via the listing agreement and by the Securities and Exchange Board of India for all matters pertaining to the capital market. The Department of Company Affairs, however, has no jurisdiction over them.