File photo of the LIC building at Nariman Point. 

LIC Board Agrees To Acquire 14.9% Stake In IDBI Bank As First Step

India’s largest insurer Life Insurance Corporation of India Ltd. will purchase 14.9 percent equity stake in IDBI Bank Ltd., as a first step towards taking majority ownership in the lender.

LIC has given “in principle approval for subscription of the equity shares on preferential basis subject to their total exposure not exceeding 14.90 percent of post issue capital of IDBI Bank at any point of time...”, the bank said in a stock exchange notification on Tuesday. The state-owned lender will approach its shareholders for an approval on this deal on Aug. 31, the notification said.

According to B Sriram, managing director of IDBI Bank, this is the first tranche of the deal between LIC and state-owned lender.

The government had earlier approved a transfer of 51 percent majority ownership in IDBI Bank to LIC. However, for LIC to increase stake in the bank beyond 15 percent, approvals are needed from the insurance regulator. Also the Reserve Bank of India’s approval is needed for the transfer of majority ownership to LIC.

Since those approvals are yet to come through, it was decided that LIC can first proceed with picking up upto 15 percent, Sriram told BloombergQuint. In an earlier interview on Aug. 16, Sriram had said that the sale of majority equity is expected to be closed within the next two to three months.

Sriram clarified that there has been no adverse opinion received from any regulatory authority so far.

Capital Infusion

By increasing its stake to 15 percent, the bank will get some capital immediately. According to BloombergQuint’s calculations, the deal will infuse Rs 2,000 crore into the bank immediately. Overall, it is expected that IDBI Bank may get between Rs 10,000-13,000 crore once the entire transaction is complete.

The stake sale in IDBI Bank, which was led by the government, intended to infuse much needed capital in the lender which is grappling with large asset quality problems. The bank reported a gross non-performing asset ratio of 30.78 percent as on June 30. Its capital adequacy ratio at the end of the first quarter stood at 8.18 percent.

The RBI has already placed the bank under prompt corrective action, where it is facing lending restrictions and is also forced to take up cost cutting measures like shutting down non-performing branches and automated teller machines.

Legal Delay?

Separately, the Delhi High Court today heard a petition by the All India IDBI Officers Association against the deal.

According to Bloomberg News, the court asked how investment regulations were relaxed for the LIC-IDBI deal to go through. As per current investment regulations, LIC cannot invest more than 15 percent in the equity of a single company.

The court has sought minutes of the LIC board meeting where the transaction was approved and asked LIC not to proceed with the IDBI investment until Aug. 30, reported Bloomberg.

The plea will be heard next on Aug. 30.

Also read: LIC Assures High Court It Will Pause IDBI Bank Deal Till Aug. 30