With no relief from Sebi, LIC to make open offer to IDBI Bank shareholders

LIC's name will be tagged to the lender's name as a part of rebranding

Insurance behemoth Life Insurance Corporation (LIC) of India will not be given any relaxation from the Securities and Exchange Board of India’s (Sebi’s) takeover code and will have to make an open offer to the stakeholders of state-owned IDBI Bank.

This will be in line with the norms set by Sebi, under which an acquisition of more than 25 per cent in a listed entity is termed as control and requires an open offer. IDBI Bank’s stocks went up 9.05 per cent to close on the BSE at Rs 53.20 on Tuesday.

“LIC will make an open offer that will be in the best interests of minority stakeholders that have over 8 per cent shares in the IDBI Bank. The government will not participate in the open offer,” a government official said.

Under this arrangement, the acquiring company must make an offer to existing shareholders to buy an additional stake in the company. It is aimed at providing the shareholders an exit option, as there may be a management change after acquisition and investors may perceive potential risks in the business.

Last month, the Insurance Regulatory and Development Authority of India approved LIC’s plan to buy 51 per cent in IDBI Bank. At present, the government owns 80.96 per cent in IDBI Bank, while LIC holds 10.82 per cent. The open offer will be made to the remaining stakeholders, with 8.22 per cent, sources said.

The deal, which would lead to a cash infusion of around Rs 130 billion in IDBI Bank, will lead to a complete rebranding of the ailing bank. According to sources, LIC’s name will be tagged to IDBI Bank, which will become a subsidiary of the former on the lines of LIC Housing Finance, LIC Mutual Fund, and LIC Pension Fund. The change in the bank’s name will require the nod of the Ministry of Corporate Affairs.

TAKING STOCK
 

• Life Insurance Corporation (LIC) to make an open offer to IDBI Bank shareholders, according to Securities and Exchange Board of India norms
   
• Centre’s stake will be diluted after LIC secures 51% stake in a preferential share deal
   
• IDBI Bank will be a subsidiary of LIC, on the lines of LIC Housing Finance, LIC Mutual Fund, LIC Pension Fund
   
• LIC’s name will be tagged to the lender’s name
   
• Internationally, insurance firms have promoted banks or have created a financial conglomerate through a holding company or a common group firm

“We have envisaged a scenario where the customer services are strengthened through a dedicated bank,” said a senior government official.

Government officials have termed the deal a “win-win” for LIC and IDBI Bank. LIC will be able to reduce operating costs, diversify, and deepen distribution, create synergies between LIC’s distribution network, and the bank’s network, “fulfilling the objective of providing both insurance and banking solutions,” the government official added.

The move will also help the bank access new funds as a result of payout of LIC claims, said an official. Internationally, insurance companies have promoted banks or created a financial conglomerate either through a group company or a holding firm, the official said. Some of the examples are Prudential Financial (which owned Prudential Bank and Trust FSB), ING Group, and MetLife.

“Banks offer bancassurance for insurance companies, in the form of an efficient, low distribution cost network.  In the absence of the same, a large insurer like LIC is at a significant competitive disadvantage,” the official explained. Bancassurance is the selling of insurance products and services by banking institutions.

Finance Minister Arun Jaitley had announced the move to bring down the government’s stake in IDBI Bank to below 51 per cent during his 2016 Budget speech. However, the trigger behind the latest move to allow LIC to increase its stake and not go for strategic disinvestment came last year. According to sources, SBI Caps, which was roped in to help the government with the strategic sales of IDBI Bank, had recommended against such a move due to “the prevailing market conditions” last year. The government also felt that the “current valuation of IDBI Bank was not reflective of its inherent value” and selling the bank to a private investor at this juncture may not have given the government the best value, officials said. IDBI Bank has a market cap of Rs 240 billion and owns real estate and non-core assets worth around Rs 70 billion each.