IDBI Bank Seeks Government Nod To Bring LIC On Board As Promoter

IDBI Bank is considering bringing Life Insurance Corporation of India on board in the role of a promoter, the bank said after a board meeting today. The lender will, however, await the government’s decision in the matter, it said.

In a notification to stock exchanges, the bank said that it had received communication from LIC expressing interest in acquiring “51 percent controlling stake in IDBI Bank, as a promoter through preferential allotment of shares/open offer.”

LIC will have a controlling stake of 51 percent and a larger role to play in the state-owned lender, IDBI Bank’s Managing Director and Chief Executive Officer B Sriram said in a press conference. “The intent is to take management control,” he added.

On Monday, the LIC board approved a plan to increase its stake in the bank to 51 percent

Regulatory Exemptions

The proposed deal between LIC and IDBI Bank requires a number of regulatory exemptions. Some exemptions have already been given and others will be needed before the deal is done.

Earlier this month, the insurance regulator had given LIC an exemption to the rule which restricts an insurance company from holding more than 15 percent equity in a single company.

The next set of approvals need to come from the government and the Reserve Bank of India.

The banking regulator’s nod will be needed for the change in promoter status, acquisition of more than 10 percent stake, and fit and proper status, Sriram said. Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services added that restrictions on promoter holdings in banks would also come into play. It remains to be seen whether the RBI treats LIC as an extension of the government or as an independent entity for its regulatory purposes, said Parekh.

As per existing rules, a diversified financial institution can hold up to 40 percent in a private bank. However, a provision in the rules allows for a higher shareholding in banks “where there are regulatory/supervisory concerns.” It is unclear whether IDBI Bank, which falls under a separate act from other PSU banks, would be deemed as private for the purpose of LIC’s investment and whether these rules would apply.

There should not be any objection to LIC coming in as a promoter, said SB Mathur, former chairman of the life insurer. “I see no difficulty in this because if LIC can be a promoter of a housing finance company, it can be promoter of an asset management company, then why can't it be of a bank,” Mathur told BloombergQuint. “The promoter anyway doesn't interfere in the day to day operations of a bank.”

An email was sent to the RBI on Tuesday evening. A response is awaited.

The Capital Commitment

As of June, LIC held about 8 percent in IDBI Bank, according to stock exchange filings. The government holds 86 percent stake in the lender. At current valuations, LIC would need to invest as much as Rs 21,000 crore to increase its stake to 51 percent in the event of a preferential issue.

The amount may increase if LIC has to make an open offer. Earlier today, Bloomberg News reported that the insurer would make an open offer. The market regulator Securities and Exchange Board of India mandates an open offer to buy out remaining shareholders when an entity acquires more than a quarter of a listed firm.

The life insurance behemoth will have to dip into its policyholders’ accounts for funding the stake buyout. But that’s not a problem, according to Mathur. “The policyholders’ money is invested over a long period of time. We have a tenor of LIC policy of over ten years,” the former LIC chairman said. “That is a fairly long period and policyholders may ultimately benefit. Even fixed debt investments are for 15-20 years.”

However, should the investment be made via policyholder funds, IDBI Bank may not classify as a subsidiary of the insurer. Hemant Bhargava, managing director at LIC declined to comment.

An Unavoidable Bail-Out?

LIC’s investment in IDBI Bank is being seen as a bail-out of the lender, which has seen close to a third of its assets turn bad. Its deteriorating financial condition has led to multiple ratings downgrades from Fitch, ICRA and S&P.

As of the March ended quarter, the bank had gross non performing assets of Rs 55,588 crore. According to an investor presentation on the bank’s website, another Rs 18,781 crore in stressed assets are still classified as standard and could be at risk of turning bad. Overall, 36 percent of the total loan book is seen as stressed by rating agency India Ratings.

The bank does not have enough capital to make provisions against these bad assets. Its core equity tier-1 ratio was at 7.42 percent as of March 2018 – just marginally above the minimum requirement of 7.375 percent.

“If the money comes to IDBI Bank, then it is a relief for the bank which needs atleast Rs 10,000 crore in capital this year,” said Kartik Srinivasan, senior vice president at ICRA. The rating agency does not foresee an immediate change in the bank’s rating but is awaiting more clarity on the deal.