The Life Insurance Corporation of India (LIC) board on Monday approved a plan for the insurer to raise its stake in the IDBI Bank to 51% from the current 7.98%. The deal will likely involve issuance of preferential shares to LIC by the stressed bank, rather than an outright sale of the government’s stake in the bank to LIC, a top official said, confirming its utility in terms of giving additional capital support to the bank.
IDBI Bank, which had received capital support of Rs 10,610 crore from the government last fiscal, the most by any public-sector bank (PSB), may get to lay its hands on another around Rs 13,000 crore thanks to the LIC deal.
IDBI Bank fell 1.48% to close at Rs 56.45 on the BSE on Monday. At current market prices, a 43% stake in IDBI Bank is worth a little over Rs 10,000 crore, but LIC may have to pay a premium.
The Insurance Regulatory and Development Authority of India had, on June 30, approved the deal, giving LIC special relaxation from its 15% holding cap for insurers in a single firm. While reports had suggested LIC might make an open offer to existing IDBI Bank shareholders, economic affairs secretary Subhash Chandra Garg said 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 said.
Securities and Exchange Board of India (Sebi) chairman Ajay Tyagi recently said the regulator hasn’t yet received any proposal from LIC about the open offer. Under Sebi’s takeover code, an acquirer has to make an open offer to the existing shareholders of the target company on acquiring shares/ voting rights of 25% or more so that they get an exit route. But it is possible that Sebi will choose to give a waiver to LIC; ONGC was exempted last year from the requirement of an open offer after it acquired the Centre’s 51.11% stake in the state-run oil retailer HPCL, as the deal involved two government-owned companies.
“Most likely that (preferential share allotment) would be the way. The bank needs capital,” Garg, who is on the board of LIC, said after the board meeting here. “The other one is that they can buy from the government but that does not provide capital to IDBI Bank and, therefore, that (preferential issue) is the preferable mode to do it,” he said.
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.
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 the deal would bring about business synergies for the insurer.
The Reserve Bank of India has initiated a prompt action on IDBI Bank, restricting its lending to only low risk-weighted assets. In the March quarter of 2017-18, IDBI Bank reported a net loss of Rs 5,662.76 crore, wider than the Rs 3,199.8-crore loss reported in the same period last year, owing to an 80% year-on-year jump in provisions.