New Delhi, February 21, 2008 - Faced with opposition from Reserve Bank of India, the government today decided to subscribe to the rights issue of State Bank of India (SBI) by issuing special marketable government securities instead of statutory liquidity ratio (SLR) marketable government securities.

In other words, the government will subscribe to the rights issue through non-SLR bonds that may get SLR status later.

The cabinet, which met here today, agreed to modify its earlier decision to issue SLR marketable government securities.

SLR is the percentage of total deposits banks have to maintain in the form of cash, gold or approved securities. At present, the minimum SLR is 25%, and SLR status would have enabled SBI to sell them to investors like banks.

The government, which holds 59.7% stake in SBI, will be subscribing to equity shares worth Rs 9,995.99 crore. The rights issue opened on February 18 and closes on March 18.

The change in rights issue subscription plan came after RBI conveyed to the government that the proposed securities cannot be notified under ‘approved securities’ within the meaning of Section 5(a)(ii) of the Banking Regulation Act and given SLR status. Exercising its power, the central bank amended the section and conveyed to the government that the option is not available.

It suggested three options to subscribe to the rights issue: (a) by cash or (b) gold valued at a price not exceeding the current market price or (c) unencumbered investment in instruments that will be referred to as ‘SLR securities’: Five kinds of securities have been listed under option (c) including "any other instrument as notified in future by the RBI for SLR status".

The finance ministry will take up the matter with RBI and request it to notify the proposed securities (special marketable government securities) as SLR securities under "any other instrument as notified by RBI."