IDBI Repeal Act mum on minimum government stake

The government has not stipulated a minimum stake that it needs to hold in the Industrial Development Bank of India Ltd (IDBI) after its conversion into a banking company.

The widespread belief that the government's holding in the institution will not come down to below 51 per cent is merely an intent and this floor of government holding is not spelt out in the IDBI Repeal Act, 2003.

In fact, the IDBI Repeal Act is silent on the minimum stake the government should have in IDBI. The only reference to shareholding in the Act is with reference to the transfer of holding from the erstwhile IDBI to IDBI Ltd on the day the conversion takes effect.

"The IDBI Repeal Act, 2003, does not specify any minimum shareholding to be retained by the government post-conversion. The government has subsequently clarified, inter alia, of its intent to retain a minimum shareholding of 51 per cent in the equity capital of IDBI post-conversion," IDBI has said in the prospectus it has filed for its Flexibonds issue.

The repealed IDBI Act, 1964, had clearly specified that the government should hold a minimum of 51 per cent stake.

There has been wide speculation on the swap ratio for the merger of IDBI Bank with IDBI.

A section of the market feels that the swap ratio would take care of the need to maintain the government's stake in the merged entity at 51 per cent.

The government's stake in IDBI is 58.5 per cent and IDBI holds a 57 per cent stake in IDBI Bank, and IDBI subsidiary Small Industries Development Bank of India (SIDBI) holds another 14 per cent stake in IDBI Bank.

An equity analyst said the need to keep the government's stake at a particular level cannot be the deciding factor in determining the share swap ratio of two listed entities.

"The strengths and weaknesses of the two banks should determine the share swap ratio. If it leads to the government's stake falling below 51 per cent, the government can always raise its shareholding through a preferential allotment," he said.

The announcement of the IDBI-IDBI Bank merger ratio is expected within the next fortnight.

IDBI chairman M Damodaran has stated that the merger ratio will be announced this month.

The book value per share of IDBI as on March 31, 2004, was Rs 111.90, while that of IDBI Bank was Rs 28.26. The shares of IDBI closed at Rs 105.65 on Thursday and that of IDBI Bank at Rs 67.85.

IDBI's financial profile has improved since March 2004 after Rs 9,000 crore of stressed assets were swapped with zero interest government bonds.

It has resulted in a sharp reduction in IDBI's non-performing assets and also freed regulatory capital as a credit risk charge of 100 per cent on customer assets will be replaced by a market risk weight of 2.5 per cent on the securities.

The transfer of the stressed assets will also improve IDBI's overall profitability as its provision requirement will decline significantly.

The paid-up capital of IDBI is Rs 652.83 crore and Rs 216.67 crore for IDBI Bank. The merger is expected to confer on the merged entity significant benefits in terms of enhanced size and improved quality of balance sheet and further lowering of overall cost of funds.

IDBI's average cost of funds is around nine per cent, against IDBI Bank's 2.5 per cent. The incremental cost of funds of IDBI is a little below six per cent.