Insurance behemoth LIC will acquire up to 51 per cent stake in state-owned IDBI Bank after regulator Irdai approved the plan that will help convert the debt-ridden lender into a private sector entity.
According to sources, the board of Insurance Regulatory and Development Authority of India (Irdai) at its meeting held today in Hyderabad permitted Life Insurance Corporation (LIC) to increase the current stake from 10.82 per cent to 51 per cent in IDBI Bank.
This would be in deviation from the existing rules which restrict any insurers having stake beyond 15 per cent in the financial firms.
Sources added that if the deal goes through, the IDBI Bank would get a capital support of Rs 10,000-Rs 13,000 crore.
State-owned LIC has been looking to enter the banking space by acquiring a majority stake in IDBI Bank as the deal is expected to provide business synergies despite the lender's stressed balance sheet.
For LIC it will get about 2,000 branches through which it can sell its products while the bank would get massive funds of LIC.
The bank would also get accounts of about 22 crore policy holders and subsequent flow of fund into their account.
"You will get to know whatever is the decision. You will get to know after the minutes of the Board meeting are approved. We will be posting it on our website," Irdai Chairman Subhash Chandra Khuntia told reporters after the conclusion of board meeting in Hyderabad.
As per the present regulation, an insurance company cannot own more than 15 per cent in any listed financial firms.
"In the case of entities from the financial sector, other than regulated or diversified or listed, the limit (for insurance companies) shall be at 15 per cent of the paid-up capital," as per the guidelines for listed Indian Insurance Companies, 2016.
According to the Insurance Act 2015, "Without prejudice to anything contained in this section, the Authority (Irdai) may, in the interests of the policyholders, specify by the regulations, the time, manner and other conditions of investment of assets to be held by an insurer for the purposes of this Act."
If the deal goes through IDBI Bank which is grappling with mounting toxic loans with gross non-performing assets rising to a staggering Rs 55,600 crore at the end of latest March quarter would get much needed capital support to revive its fortune. During the three months, the lender's net loss stood at Rs 5,663 crore.
The government would not get the proceeds from the stake reduction as the money would be utilised for the bank's revival. It could happen through issuance of fresh equity so that the government's stake which is presently at 80.96 per cent would come down below 50 per cent as announced in the Budget.
A possible scenario would be the insurance major making IDBI Bank as a subsidiary on the line of its housing finance and mutual fund businesses. According to the sources, there would be business synergies in case the LIC-IDBI Bank deal materialises.
In his Budget speech for 2016-17, then Finance Minister Arun Jaitley had said the process of transformation of IDBI Bank has already started. "Government will take it forward and also consider the option of reducing its stake to below 50 per cent," he had said.
Analysts opined that going forward, IDBI Bank investors are likely to see good appreciation of their investments due to various factors, including resolution of bad loans.
Last year, Jaitley had said that India is not ready for privatisation of public sector banks and their present characteristics would continue except for IDBI Bank.
Earlier this year, the government infused Rs 10,610 crore into IDBI Bank.
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