Global rating agency Moody's today placed IDBI Bank's long-term ratings on review for upgrade, driven primarily by the proposed acquisition of 51 per cent in the lender by the Life Insurance Corporation of India (LIC).
Moody's has also put on review for upgrade the long term rating of the bank's Dubai International Financial Centre (DIFC) branch.
The outlook for both the entities has been changed to 'ratings under review'.
"The primary driver for the review is the announcement by IDBI Bank on July 17 that LIC has expressed interest in acquiring a 51 per cent controlling stake in it through the preferential allotment of shares/an open offer," the rating agency said today.
The bank's board has sent the LIC's proposal for buying 51 per cent to the government for approval.
LIC holds 7.98 per cent in the bank currently, while the government owns 86 per cent. The balance 6 per cent is with the public.
Moody's said the review for upgrade will focus on the exact amount of fresh equity that LIC will inject into the bank and its impact on IDBI's capitalisation.
The presence of any regulatory limitations on LIC's ability to provide further support, and particularly on it ability to raise its stake above 51 per cent, will also be considered before the possible review.
"In order to build a 51 per cent stake, LIC will subscribe to new shares, which will be positive for the bank's capitalisation," it said.
The rating agency will consider LIC's relatively strong credit profile, its controlling ownership as well as the reputational risks involved if IDBI Bank were to fail.
The proposed investment by the LIC into the bank will be funded by policyholder funds rather than the life insurers own funds.
"The use of policyholder funds for this investment means that the company's authority to make investment decisions is constrained by investment guidelines for insurance companies in the country," it said.
For this transaction, LIC had to obtain special exemption from the insurance regulator as insurance companies are prohibited from taking more than a 15 per cent stake in any company when investing policyholder funds.
Currently, Moody's assumes a 'very high' level of support from the government for the bank, in line with all Indian public sector banks.
It, however, said upon completion of the transaction, in contrast to other public sector banks, the government will no longer be the controlling shareholder in the bank.
Hence, it will also review its assumptions for government support.
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