Government's IDBI Bank Stake Sale Plans Run Into RBI Rules—BQ Exclusive
A planned stake sale at IDBI Bank Ltd. could see further delays as potentially interested buyers may not meet the banking regulator's requirements.
The government and Life Insurance Corp. of India have been in discussions to reduce their stake in IDBI Bank, which was rescued by the insurer in 2019. International investors such as Blackrock, KKR-InCred, Avenue Capital and Prem Watsa's Fairfax Financial Holdings, had expressed initial interest in IDBI Bank, BloombergQuint had previously reported.
However, the Reserve Bank of India is not in favour of allowing large funds to pick up a controlling stake in domestic lenders, according to two people in the know, who spoke on condition of anonymity.
Over multiple meetings, the Department of Investment & Public Asset Management and the banking regulator have discussed the idea, with no consensus emerging, the first of the two people cited earlier said.
In particular, the issue of allowing foreign funds to pick up a large stake has faced questions from the regulator.
The RBI is said to have sought details of all investors in these funds, such as limited partners who contribute to it, in order to ensure that they meet the regulator's fit and proper regulations, the first person said.
According to a third person familiar with the matter, the regulator is going by the current rules governing private bank ownership. As long as the rules governing bank ownership are not amended, the regulator cannot ease its position, this person said.
To maintain stability of the financial system, the regulator thinks it must have clear information about the ultimate beneficiaries of shareholding in a bank. This means that investors in a fund with a large shareholding in a domestic bank must meet the fit and proper requirements, the third person said.
Queries emailed to RBI, DIPAM, LIC and IDBI Bank on Wednesday remained unanswered.
What The Rules Say
Currently, while aggregate foreign shareholding in private banks is allowed up to 74% under the foreign direct investment route, a portfolio investor can hold more than 5% only with the RBI's approval. The cap for non-promoter holding is at 10% and at 15% for financial institutions and supranational institutions.
In a set of master directions issued in 2016, the RBI had specified that for foreign investors holding more than 5% in a bank, the regulator will seek "extensive information on ownership of the investors and beneficial interest in the shares/voting rights being acquired".
There have been exceptions to this rule.
In certain stressed cases, such as CSB Bank in February 2018, the regulator had allowed a foreign investor, in this case Fairfax, to take majority ownership. More recently, DBS Bank India took over Lakshmi Vilas Bank Ltd.
IDBI Bank, however, is not in a precarious position anymore.
For the quarter ended September, its net profit rose 75% year-on-year to Rs 567 crore, with operating profit of Rs 1,209 crore. Capital adequacy ratio stood at 16.59%, with Tier-1 capital at 14%. Gross non-performing asset ratio was elevated at 20.92%, however these loans are provided for, with net NPA ratio at 1.62%.
The regulator is keen on not turning exceptional approvals into a norm, the first person cited earlier said.
What Are The Options?
DIPAM is seeking an alternative plan to close the stake sale soon. However, a clear strategy is yet to be decided upon, the first person said.
The sale of the government's stake in IDBI Bank is important for the divestment plan. The sale of LIC's stake in IDBI Bank may also be important ahead of the insurance giant's initial public offering. Presently, the government holds 45.48% stake in IDBI Bank, while LIC holds 49.24%.
The government's decision to sell stake in IDBI Bank had first been announced in February, during the union budget announcement. In May, the cabinet of ministers had approved a strategic sale of the government's and LIC's stake in the bank.
"The economy needs banks with large size and scale, which also have a good depth of capital. That should be the priority of the regulator when reviewing proposals from any investor. The quality of the promoter is relevant, and meeting the ‘fit and proper’ criteria should be the base. Anything more you overtake the needs of the economy," said Amit Tandon, founder and managing director of Institutional Investor Advisory Services. "The ownership rules and how much a new investor can own in a bank comes much after that."