LIC Board Approves IDBI Bank Acquisition

Transaction may be via preferential shares, likely to be valued at about ₹12,000 crore

The board of the Life Insurance Corp. of India (LIC) approved a proposal to acquire 51% of state-run IDBI Bank, possibly through preferential shares, in a plan aimed at changing the lender’s fortunes. The government-owned insurer currently holds a 7.98% stake in the bank that’s laden with bad debt.

“Most likely (preferential shares) would be the way—the bank needs capital. They will issue preferential shares, that should be the method,” said economic affairs secretary SC Garg, who is also on the board of the state-run insurer. “The other (option) is that they can buy from the government but that does not provide capital to IDBI Bank and, therefore, that is the preferable mode to do it,” he said after the LIC board meeting in Delhi.

The government has been keen to convert IDBI Bank from a staid, state-owned entity burdened with rotten assets into a lender with the dynamic character of a private sector lender like Axis Bank. Arun Jaitley had said in his FY17 budget speech that IDBI Bank’s transformation had already begun and that the government would also consider the option of reducing its stake to below 50%.

The strategy hasn’t been without its opponents, including the unions of both LIC and IDBI Bank. The Congress and the Left parties have also criticised the plan, saying that the people’s savings with LIC would be used to bail out IDBI Bank.

IDBI Bank will soon hold a board meeting to approve the transaction that’s likely to be valued at about ₹12,000 crore, according to a government official.

LIC may Get 4 Board Seats

LIC could get four seats on the IDBI Bank board following the acquisition, the official said.

LIC will approach RBI and Sebi for approval. The Insurance Regulatory and Development Authority of India (IRDAI) has already given its nod for the acquisition by LIC. The deal is also expected to go to the Union Cabinet for approval. The government holds an 85.96% stake in the bank as of now.

Garg also indicated that LIC may not have to make an open offer as per Sebi takeover regulations because the public holding in the bank is very limited.

“Open offer may or may not come about,” Garg said. “The public shareholding is very small — it is only about 5%. And the pricing formula, etcetera, may not be attractive. But they will go through that process and if necessary they will make that open offer, but it is not a very material issue in this context.”

IDBI closed at ₹56.45 on the Bombay Stock Exchange (BSE), down 1.48% on a day the banking sector barometer Bankex shed 0.98%. IDBI Bank’s gross nonperforming assets or bad loans grew to ₹55,588 crore in March from ₹44,753 crore a year earlier.

BENEFITS FOR LIC

The government is of the view that LIC will eventually emerge as a beneficiary as it will get 2,000 branches of the bank through which it can sell its products. In addition, the bank also has real estate assets and non-core assets of ₹14,000 crore that can be monetised, said the official cited above.

The government had first announced its makeover intent in 2015. In early 2016, when Jayant Sinha was junior finance minister, some talks were held to sell the government stake to multilateral institutions. It was reported at the time that International Finance Corporation (IFC), an arm of the World Bank, was keen to acquire a stake. The other contenders were said to be GIC of Singapore, the Asian Development Bank and Commonwealth Development Corporation.

While none of the aforementioned confirmed that any talks were held, government sources said the discussions didn’t take formal shape because of differences over valuation. Sinha left the finance ministry later that year and the interest of private players fizzled out.

A senior government official told ET that there was no point in selling its stake in the bank at a low valuation that would have later been questioned in the courts and would have also drawn vigilance complaints.

“IDBI had real estate, non-core assets, but this was not being captured in the valuation process, and that is why the government’s plan keep getting delayed,” he said.

UNION VIEWS

While the LIC unions have opposed the deal on the grounds that it will hurt the interest of policyholders, the IDBI union said the government had given an assurance that IDBI Bank would not be turned into a private lender.

“This is a clear attack on the autonomy of the LIC board. The government has cornered the insurer to opt for this acquisition which is a very bad deal for us,” said Federation of LIC Class-Officers Association general secretary S Rajkumar, adding that it will join hands with all other insurance unions and take a call by the end of this week on their action plan.

The IDBI union has approached lawmakers to take up their cause in the upcoming session.

“By the end of this week we will announce the strike action. We have already approached a few parliament members to raise our concerns on the floor of both the houses,” said All India IDBI Officers’ Association general secretary Vithal Koteswara Rao. The government had given a solemn assurance on the floor of parliament that it wouldn’t allow its stake to drop below 51%, he said.

Source: Economic Times

Date: 17th July 2018

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