Life Insurance Corporation (LIC) will have to convince the Reserve Bank of India (RBI) that its acquisition of a majority stake in state-run IDBI Bank will not pose any conflict of interest with its holding in a number of other banks, and that it won’t jeopardise stability in the broader financial system either, a source told FE. One way for LIC to strengthen its case would be to give a commitment to the banking regulator that it would trim its stake to below 10% in a number of banks within a strict time frame, said the source. The central bank may soon consider whether LIC is fit and proper to be the promoter of IDBI Bank, said the source.
LIC wants to be the promoter of IDBI Bank after raising its stake to 51% from 7.98% now. At present, LIC holds over 13.64% in Axis Bank, 13.03% in Corporation Bank, 12.24% in Punjab National Bank, 10.23% in State Bank of India and 10.20% in Syndicate Bank.
The finance ministry will circulate a Cabinet note on the LIC-IDBI Bank deal within a week for wider consultations, with the public sector bank (PSB) having sought the government’s approval, an official source told FE. Apart from the Department of Financial Services, the process of consultation could see the participation of the departments of investment and public asset management, expenditure and corporate affairs, among others. “The idea is to expedite the approval process so that the operations of both the entities (LIC and IDBI Bank) continue to run smoothly without any uncertainties, and unnecessary speculations are put to rest,” said another source. The Cabinet approval may take two-three weeks.
Already, the LIC board on Monday approved the plan for the insurer to raise its stake in the IDBI Bank to 51% from the current 7.98%. Subsequently, the IDBI Bank has sought the government approval for the deal. The deal will likely involve issuance of preferential shares to LIC by the stressed bank and also an open offer, if required. The government held 86% in IDBI Bank as of end-June.
The bank, which had received capital support of Rs 10,610 crore from the government last fiscal, the most by any PSB, may get around Rs 13,000 crore from LIC following the deal. One of the sources said the valuation of the deal will follow Sebi rules and the acquisition will happen in one go, not in phases.
Late last month, the Insurance Regulatory and Development Authority of India had approved the deal, giving LIC a special relaxation from its 15% holding cap for insurers in a single firm. On the issue of LIC making an open offer to existing IDBI Bank shareholders, economic affairs secretary Subhash Chandra Garg said this week that whether such an offer would be made or not was “immaterial” here, given the low public shareholding (‘non-institutions’ hold just 4.2% in the bank). “It (public shareholding) is only about 5%. And the pricing formula may not be attractive. But LIC will go through that process and if necessary they will make that open offer,” he had said after a meeting of the LIC board.
While many analysts feel the deal to acquire the stressed bank could also cast clouds on LIC’s fiduciary duty to its millions of policyholders, there is also a view that it could bring in handsome returns for the insurance behemoth if the bank turns around using the funds it gets in coming quarters and its share price starts soaring again.
Despite massive infusion by the government last fiscal, IDBI Bank’s core equity capital stood at 7.42% as on March 31, just above the minimum regulatory requirement of 7.37%. Its gross non-performing assets (NPAs) zoomed to 27.95% and net NPAs to 16.69%, the most reported by any PSB.
The RBI has already initiated a prompt corrective action on IDBI Bank, restricting its lending to only low-risk assets. In the last quarter of 2017-18, IDBI Bank reported a net loss of Rs 5,662.76 crore, much higher than Rs 3,199.8 crore in the same period last year, thanks to an 80% jump in provisions year on year. The bank’s share price on the BSE gained 1.93% on Friday to Rs 57.95, still much lower than the 52-week peak of Rs 89.80 hit in March.