Bank stake sales in insurance, mutual fund subsidiaries hit a wall

Lenders await RBI norms on holdco structure; guidelines are likely to be finalised by year end

Even as private banks have the appetite to acquire stakes of public sector banks in insurance or mutual fund subsidiaries, there is no progress in the matter as they await clarity on holding company (holdco) structure norms from the regulator. 

Sources say given the complexity involved in the process of creating a holding company, which will ultimately be the parent company of banking and other businesses, banks are going slow in acquiring stakes in insurance arms or mutual funds of other lenders. 

“The Reserve Bank of India (RBI) has held initial talks with banks on this matter and guidelines on the holding company structure are expected by the end of 2019,” said a person aware of the development. 

Under the new norms, a bank will have to unwind its shareholding in subsidiaries, and the existing shareholding of the bank will be transferred to the holdco. 

Until these norms are issued, banks believe obtaining the regulatory go-ahead from the RBI on such deals could be difficult. “Once the discussion paper on the holdco structure is released, banks will have a better sense of how the business reorganisation can be done,” he added. 

It is understood that banks awaiting clarity on this front is among the key reasons for the divestment process initiated by public sector banks (PSBs) hitting a roadblock. State-run banks have identified non-core assets for sale, but are unable to close in on the stake sale within reasonable timelines. 

“Some of the non-core assets, especially in the life and general insurance space, have evoked substantial interest from private banks,” said a banker with direct knowledge of the development. “However, they (private banks) feel the timing may not be appropriate to add subsidiaries.”

Among others, two prominent transactions doing the rounds are the stake sale of IDBI Bank in IDBI Federal Life Insurance and that of PNB Metlife.

In the case of the former, sources say, Federal Bank may be interested to pick IDBI Bank’s stake. “Terms of the joint venture (JV) are also favourable for Federal Bank. Both banks are receiving interest from domestic and foreign entities, but it may take a while for the deal to go through,” said a highly placed source. PNB Metlife is looking to list its life insurance arm after talks with several interested parties, including some large private banks, did not materialise. It is gathered that Axis Bank may also be interested in acquiring Max Life Insurance. “That transaction may progress once there is clarity on holdco norms,” said a source. 

Bank subsidiaries may also be reluctant to pursue deals directly until holdco norms are finalised. “Since banks are currently holding companies, they feel the RBI may not be comfortable if subsidiaries add more bulk though inorganic channels at this point in time,” said a banker. Given that reorganising the holding company structure may entail significant tax outgoes and other levies, such as stamp duties, banks are hesitant to complicate the current business model through such deals. 

Proposed by the RBI’s former deputy governor Shyamala Gopinath in May 2011, the working group under her aegis recommended for dispensation of these charges before the new structure can be implemented. The idea to create a holdco model was mooted after the Lehman crisis, which shook the financial world, especially in the West. 

Since then, the RBI has sought to demarcate the capital of banks from the losses of its subsidiaries — a move that would ultimately safeguard deposit holders’ interest.  The holdco structure is mandatory under the current licensing norms for universal banks. Bandhan Bank and IDFC First Bank operate under this structure.