Only Capital, No Control In The LIC-IDBI Bank Deal: Exclusive

Life Insurance Corporation of India may acquire a substantial stake in IDBI Bank Ltd. by infusing fresh capital but will not be permitted any management control, two officials aware of the matter told BloombergQuint on condition of anonymity.

The state-run IDBI Bank will issue fresh equity to LIC increasing the insurer’s stake to at least 40 percent from the existing 8 percent, the people said. Currently, the government owns 86 percent and public shareholders hold 6 percent.

IDBI Bank needs approximately Rs 13,000 crore in additional funds, said one of the persons cited above. Hence, the two scenarios being considered are:

• LIC infuses close to Rs 21,000 crore at current market price to acquire at least 51 percent.
• LIC invests Rs 13,000 crore at current market price to increase its stake to up to 40 percent.

But in neither case will LIC control the bank’s management, said the second person quoted above. It will most likely get up to three board seats and remain a strategic investor in the bank.

The Insurance Laws (Amendment) Act, 2015 and the Life Insurance Corporation Act, 1956 do not allow any insurer including LIC to hold more than 15 percent in any company. Any investment above that cap will require exemption from the regulator. Apart from that, Section 35 of the Insurance Act also does not allow a life insurer to acquire or have control in a non-insurance entity. The Insurance Regulatory and Development Authority of India is slated to meet on June 29 to decide on such a relief, said one of the persons cited above.

In Union Budget 2016-17, the Finance Minister had said the government could consider reducing its stake in IDBI Bank below 50 percent. Depending on LIC’s final stake, the government and public shareholding in the lender will reduce proportionately.

The government does not need a Parliamentary approval to reduce its stake below 51 percent, an IDBI Bank official said on condition of anonymity. But the lender will have to amend its Articles of Association for that, the person said. It can be done through a special resolution passed by shareholders via postal ballot. The bank last amended its AoA in May this year to increase its authorised capital to Rs 8,000 crore.

LIC’s acquisition of stake in the lender will also need special consideration from the Securities and Exchange board of India regarding takeover code provisions. The insurer is likely to be exempted from the mandatory change-in-control open offer as no preferential voting rights, management rights or control will be granted to LIC, the two people quoted earlier said.

Further, as per SEBI guidelines, LIC may be required to pare its stake to meet the minimum public shareholding requirement of 25 percent in the next three years. Public shareholding in the bank is expected to shrink substantially after the deal.

India Ratings estimates that IDBI Bank’s total stressed portfolio (including non-fund based facilities) is 35.9 percent of total loans. This means that the bank will need significant capital to clean up its books and maintain minimum levels of regulatory capital.

The bank’s core equity capital stood at 7.42 percent as of March 31, which is above the regulatory minimum. This was because of the Rs 10,610-crore capital infusion it got from the government in the year ended March 31, 2018. It received a second tranche of capital worth Rs 7,881 crore in May-end, which took the government’s shareholding to 85.96 percent in the bank. India Ratings said in 2018-19, IDBI Bank will need more than the Rs 10,000 crore that it received from the government last fiscal.

The state-owned lender also plans to sell the five non-core assets to raise Rs 5,000 crore, its deputy managing director told BloombergQuint in an interaction on Aug. 30 last year. These companies included: IDBI Federal Life Insurance Company, IDBI Asset Management Ltd., IDBI Trusteeship Services Ltd., National Securities Depository Ltd (NSDL) and NSDL e-Governance Infrastructure Ltd.

The email written to LIC remained unanswered at the time of publishing the story. While IDBI Bank declined to comment, IRDAI is yet to respond to BloombergQuint’s query.