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LONDON (Reuters) - Britain should hand most of its shares in Royal Bank of Scotland <RBS.L> and Lloyds Banking Group <LLOY.L> to the public, an influential think tank said, in what would be the country's biggest ever privatization.
Here are the government's main options:
DISTRIBUTION TO TAXPAYERS
Sell a minority tranche of shares to institutional investors and distribute the rest to taxpayers.
This would allow a quick full privatization, recoup most of the government's money, offer a low-risk windfall to taxpayers, and remove the overhang of share sales, allowing RBS and Lloyds shares to rise, think tank Policy Exchange said.
Risks to the plan are that RBS and Lloyds shares may not rise above a floor price for some time - which could create a frustrated public - or the logistical issues of distributing shares to up to 48 million people.
STAGED SALE TO INSTITUTIONS
This is a typical exit route and has appeared to be the Finance Ministry's preferred option.
It involves sales of tranches of shares, probably of up to 5 billion pounds a time, and has the advantage of being flexible in terms of the size and timing, depending on share price performance.
The problem is with less than two years until the next parliamentary election there is a limit to how much could be sold, which hinges mainly on the share price performance. The government could have to pledge not to sell more shares for 6-12 months after each chunk, which means the sale of the RBS stakes could take more than a decade.
The government could also attempt to seek a sovereign wealth fund or other big investor to take a large slice of shares.
"TELL SID" PRIVATISATION
A traditional privatization to financial institutions and the general public, like those for BT <BT.L> in the 1980s. The 1986 sale of British Gas had a campaign to encourage more private share ownership, or to "Tell Sid" about it.
This route would allow the government to sell a bigger stake in the banks.
There are big risks, however, including that the public could lose money - which is seen as politically dangerous given taxpayers' anger at the bailouts banks have already received.
To avoid this a bigger discount could be applied. But this could have to be offered to all European Union citizens under EU law. Another flaw is that wealthy individuals are more likely to participate, whereas all taxpayers contributed to the bailout.
The government could give away shares to taxpayers, although this would be the most painful option at a time when it is trying to improve the country's finances.
Giving taxpayers the full value of RBS shares would trigger a writedown in Treasury accounts of at least 33 billion pounds ($51 billion), and close to 50 billion if Lloyds shares were given away too, Policy Exchange said.
There would also be the risk of people immediately dumping millions of shares as soon as they received them.
The government could consider transactions like an exchangeable debt issue, where shares are sold at a future date and at a predetermined price, to ensure a target is achieved.
These transactions are likely to be modest in size and could accompany any institutional placement strategy.
($1 = 0.6442 British pounds)
(Compiled by Steve Slater; Editing by Erica Billingham)