The Reserve Bank of India’s (RBI’s) much-awaited decision on the fit-and-proper profiles of the bidders for IDBI Bank will likely be conveyed this month to the government, a source privy to the matter said. This would pave the way for the first strategic disinvestment of a bank, with a significant government holding, immediately after a new government assumes office after the April-May general elections.

The sale of IDBI Bank, formerly a public sector bank, is seen as a test case for the new public sector enterprises policy, which aims to minimise government’s presence in businesses, including banking, as the Centre feels private sector is best suited to scale up businesses, with skin in the game. Recent laudatory comments on public sector undertakings by Prime Minister Narendra Modi have strengthened the perception that the government may be rethinking its policy with regard to these firms.

Reports had suggested that Kotak Mahindra Bank and Fairfax India Holdings (promoter of CSB Bank) are likely in the fray for IDBI Bank.

“The RBI’s ‘fit-and-proper assessment’ of the bidders is at a pretty advanced stage and the approval could come during this month,” the source, who did not wish to be identified, told FE.

Clearance from the banking regulator would be the biggest milestone in the disinvestment process of the bank for which the government had received multiple expressions of interest (EoI) on January 7, 2023.

On October 7, 2022, the Centre invited EoIs for IDBI Bank and offered to sell a total of 60.72% stake in the bank, including 30.48% (approx. Rs 28,000 crore) from the government and 30.24% from LIC, along with the transfer of management control in the bank. Post-sale, the Government and LIC together will have a 34% residual stake in the lender (19% by LIC and 15% by the government).

Post RBI approval, the eligible bidders will do their due diligence of the bank. They would be given access to the banks’ virtual data room for a better understanding of the business of the bank and to clarify their doubts if any, the official said.

The bidders would also go through the draft share purchase agreement (SPA) in which the government and promoter LIC would work towards satisfying a set of conditions precedent defined in the SPA, including various regulatory approvals. Thereafter, financial bids will be called.

All these processes could be over by the new government taking office after elections in April-May, making it one of the key strategic disinvestment proposals in the pipeline to go through in 2024-25.

To make the sale smooth, the government to give assurance in the SPA that the potential buyer would have a free hand in the running of the bank such as a change in management, etc. According to the Banking Regulation Act, 1949, the voting rights of a shareholder or shareholders acting in concert in a bank can’t exceed 26% even if they own more than 26%.

In effect, the acquirer of IDBI Bank with a 60.72% stake will have a voting right of 26% only, the same as the government and LIC.

In the event of a bank winning the bid to acquire IDBI Bank, the promoters would be given reasonable time to merge both entities to comply with the RBI’s norms that a promoter/promoters could have one bank licence only, sources said.

Following improvement in asset quality, the IDBI Bank exited the prompt corrective action (PCA) framework of the RBI in March 2021. After a gap of five years, it was back in the black with a net profit of Rs 1,359 crore for FY21. It posted a net profit of Rs 2,439 crore in FY22 and Rs 3,645 crore in FY23.