LIC Board Approves Proposal To Buy 51% Stake In IDBI Bank
The board of Life Insurance Corporation of India today approved a proposal to buy up to 51 percent stake in IDBI Bank Ltd.
The government-owned lender needs capital, and so the preferred option for the stake purchase is a preferential issue of shares, Department of Economic Affairs Secretary Subhash Chandra Garg told reporters in New Delhi. The government's stake, which is presently at 86 percent, will come down below 50 percent through issue of fresh equity.
IDBI Bank needs capital so they would issue preferential shares. The other way is that they can buy from the government but that doesn’t provide capital to IDBI Bank, so it (issuing preferential shares) is the preferred way to do it.Subhash Garg, Secretary, Department of Economic Affairs
Garg added that an open offer may not be required but added that LIC will make such an offer if needed. “They will go through that process if necessary. But this is not very material,” said Garg while adding that public shareholding in the bank is quite low.
The deal will now need the approval of IDBI Bank’s board, said Garg who also is the government’s representative on LIC’s board. The IDBI Bank board will meet soon to consider the investment proposal, Bloomberg News reported.
The board of the Insurance Regulatory and Development Authority of India has already permitted LIC to increase its stake from 10.82 percent to 51 percent in IDBI Bank. The proposed deal will also need a nod from the Government and the Reserve Bank of India.
A Bailout Of IDBI Bank?
Should LIC increase its stake in IDBI Bank via a preferential issue of shares, the bank will get much needed capital.
The lender had a staggering Rs 55,600 crore in bad loans at the end of the March quarter. According to rating agency ICRA, 36 percent of the bank’s total loan book is seen as stressed. The bank needs significant amounts of capital to provision against these loans, which it is unable to generate internally despite recent sales of non-core assets. As of March, the bank had a core equity tier-1 ratio of 7.42 percent – just marginally above the minimum requirement of 7.375 percent.
While LIC hasn’t detailed the amount of capital that would be infused into IDBI Bank, Bloomberg News reported that LIC could invest upto Rs 13,000 crore to increase its stake in the lender.
“From IDBI’s point of view, it is definitely getting the much-needed capital. So for the bank this should be good,” Kartik Srinivasan, senior vice president at rating agency ICRA told BloombergQuint. Srinivasan said the bank’s rating would not immediately be impacted since a high level of capital support would be factored in from LIC.
Also read: The Fractured Legacy Of IDBI Bank
What’s In It For LIC?
For LIC, the investment into IDBI Bank will likely be more financial than strategic in nature.
On June 29, BloombergQuint reported that LIC will not get management rights on the board of IDBI Bank and must pare its stake in the bank to 15 percent over a period of five to seven years. ICRA, in its rating note on July 10, had also highlighted that since the investment would be made from LIC’s policyholders’ account, the stake would be “transient in nature.”
In this scenario, LIC would need to find private investors a few years down the line to buy out it’s holding in the bank. D.K. Mittal, former banking secretary in the government of India said that this would be positive for LIC as it could potentially exit its holding in the bank at a profit down the line. It is tough to tell whether that will be the case, said Srinivasan.
LIC already holds more than 10 percent stake in atleast six government-owned lenders. It also has its own loan book and is an active investor in debt securities. In the past, RBI officials have raised concerns about these inter-linkages between the country’s largest insurer and the banking sector. This remains a concern, said Hemindra Hazari, independent banking analyst. “LIC’s investment in IDBI Bank is different from its investment in other PSU banks. Here you are taking majority control. In my view, RBI should not have allowed for such a transaction to have taken place,” Hazari told BloombergQuint.