Irdai allows LIC to buy up to 51% stake in debt-ridden IDBI Bank

The Insurance Regulatory and Development Authority of India (Irdai) board on Friday approved Life Insurance Corporation’s investment in IDBI Bank, allowing LIC to own up to 51 per cent in the beleaguered lender. LIC will now be able to pump Rs 100-130 billion into IDBI Bank in tranches through a preferential allotment of new equity shares at a price determined by a formula under the Securities and Exchange Board of India’s (Sebi’s) rules. 

However, Irdai put some caveats and directed the insurer to bring down its stake in IDBI Bank over a period of five-seven years. “The regulator has asked LIC to submit a plan with a timeline for paring its stake in the bank,” said a government official in the know.

LIC sources maintain that it will only be an investment for the insurer. “LIC would remain a strategic investor in the bank and it will not control the bank’s management,” said a source. However, the insurer will appoint one or two directors to the bank’s board.

The deal comes with several regulatory challenges, though. It will trigger an open offer as LIC will acquire more than a 26 per cent stake in the fresh issue. Also, it is not clear whether LIC’s shareholding will be considered public shareholding. IDBI Bank’s current public shareholding, at around 19 per cent, is below the Sebi-mandated 25 per cent. LIC and IDBI Bank would need to seek clarification on both issues from the market regulator.

LIC, which holds stakes in several banks, will also need the Reserve Bank of India’s (RBI’s) approval to own such a large stake in IDBI Bank. Both IDBI Bank and LIC own mutual fund arms, which too are not allowed under the Sebi rules. LIC will also end up owning a stake in IDBI Federal Life Insurance after this purchase, which will be a breach of Irdai’s regulations. Irdai may already have considered this issue before giving the clearance. 

However, experts are optimistic on LIC getting all due regulatory clearances as it is a government-owned institution, which has rescued ailing public sector banks in the past too.  

“It is a radical decision and one could sense that there was an element of urgency as public sector banks are going through a tough time. It will be interesting to see how the working scenario would change at the bank on various fronts, such as their business practices, corporate governance, and so on,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services.

LIC has over a 10 per cent stake in six public sector banks, including IDBI Bank.

LIC held 10.82 per cent in the beleaguered bank in March 2018. The government’s current stake is 80.96 per cent, which will drop below 50 per cent.

J N Gupta, managing partner, Stakeholder Empowerment Services, says IDBI Bank will remain a public sector bank. “It is irrelevant how much the equity distribution between the government and LIC is as long as the total is more 51 per cent. IDBI Bank’s status would not change after this deal,” he added.

V G Kannan, chief executive, Indian Banks’ Association (IBA), said, “Running a bank is not the same as managing an insurance company and the LIC management wouldn’t have the bandwidth to run a bank.” The control should not vest with the insurer, he added. 

A former IDBI Bank official said capital would no longer be a problem for the bank. “If the government holding does indeed fall below 50 per cent, it will be an opportunity for the bank management to overcome its problems,” he said. “If B Sriram gets a longer tenure with a free hand to run the bank, his all-round experience in retail and corporate banking will provide an edge,” he added.

The government has been attempting to bring a strategic investor in the ailing public sector lender for over three years but has not met with success. International Finance Corporation had done due diligence of the bank’s books, but the matters did not move ahead.

Currently, IDBI Bank is under the RBI’s prompt corrective action framework due to very high level of bad loans.