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* 48 million taxpayers would be eligible to apply for shares
* Taxpayers could get shares worth up to 1,650 pounds
* Proposal includes sale of remaining shares to institutions
* Would enable full privatisation of banks in 2014
By Matt Scuffham
LONDON, June 10 (Reuters) - Britain should hand most of itsshares in Royal Bank of Scotland and Lloyds BankingGroup to the public, an influential think tank said, inwhat would be the country's biggest ever privatisation.
The government, which pumped a combined 66 billion pounds($102 billion) into the banks to keep them afloat during the2008 financial crisis, wants to remove them from state controlbefore the next parliamentary election in 2015.
Prime Minister David Cameron last month said he was "open toall ideas" for returning the banks to private ownership, anapparent shift in government thinking.
The Finance Ministry and UK Financial Investments (UKFI),which manages the government's shareholdings, have been expectedto favour selling the shares in blocks to financialinstitutions, such as pension funds.
Think tank Policy Exchange said the government should sell aminority of the shares to institutions and hand the rest to thepublic via a mass distribution that could give individualsshares worth up to 1,650 pounds.
"We urge the Chancellor to take this method and apply it toboth RBS and Lloyds giving the taxpayer an opportunity to profitfrom both and get the banks back into the private sector, wherethey belong," Policy Exchange said in a report on Monday,refering to finance minister George Osborne.
Lloyds is currently valued at 44 billion pounds, while RBSis worth around 19 billion. The sale of both banks would dwarfthat of Britain's Royal Mail which, with a value of 2-3 billionpounds, is expected to become the country's biggestprivatisation for two decades later this year.
Policy Exchange is known to have the ear of seniorgovernment figures, adding weight to the chances of its proposalbeing given serious consideration. Osborne hired Neil O'Brien, aformer director of the Policy Exchange, as a special adviserlast year.
Osborne could address the issue in his annual Mansion Housespeech to financiers on June 19. He is also waiting for thepublication later in June of a report from the ParliamentaryCommission on Banking Standards, before he decides on what to dowith the RBS and Lloyds shares.
Policy Exchange's proposal would enable 48 million taxpayersto apply for shares at no cost and with no risk attached, thethink tank said. A 'floor price' would be set and taxpayerswould make a profit on any rise in the shares above that level.
The Policy Exchange report didn't indicate what the floorprice for each bank should be.
But, for example, the government could set it at 400 penceon RBS shares, and, if a taxpayer takes the shares and latersells them at 500p, they would get 100p per share and theTreasury would automatically get 400p back.
Taxpayers would not lose money as the shares would bereturned to government ownership after ten years should they notrise above the floor price.
The think tank estimates only 20 to 30 million people wouldapply for the shares with many thinking it would require toomuch time and effort, despite applicants only needing to supplytheir name, address and national insurance number.
Taxpayers would receive shares worth between 1,100 poundsand 1,650 pounds depending on how many people take up the offer.
The government holds an 81 percent stake in RBS and 39percent in Lloyds. Around 70 percent of the shares, currentlyworth 48 billion pounds, would be given to taxpayers under theproposal.
Policy Exchange said the option of selling all the shares toinstitutions would take years to complete. The think tank saidit had spoken to institutions who had indicated the governmentwould not be able to sell shares worth more than 5 billionpounds at a time and would have to wait for a year betweensales, so as to avoid flooding the market.
A mass share distribution, by contrast, would enable bothRBS and Lloyds to be fully nationalised in 2014.
The report, written by James Barty, former head of globalequity strategy at Deutsche Bank, dismissed the idea of givingaway shares to the public without the government claw-back,saying that would increase national debt by around 50 billionpounds.
Shares in Lloyds are currently trading marginally above theprice which the government regards as break-even. However, thegovernment is sitting on a loss of 9 billion pounds on itsinvestment in RBS at current prices.
