Shares of the debt-ridden IDBI Bank shot up over 16 per cent in two days, reacting to news that LIC will be making an open offer to minority shareholders of the bank in which it proposes to buy a controlling stake. The buzz earlier was that the Securities and Exchange Board of India (Sebi) will relax its norms for the deal - just like Insurance Regulatory and Development Authority of India (IRDAI) last month relaxed its rule of not allowing any insurer to own more than 15 per cent in any company and permitted LIC to increase its stake in IDBI Bank from close to 11 per cent currently to up to 51 per cent.
Under Sebi's takeover code, if a company acquires more than 25 per cent in another listed company, it has to make an open offer to minority shareholders to buy at least 26 per cent more in the target firm. But, reportedly, no such relief is expected from the markets regulator.
"LIC will make an open offer that will be in the best interests of minority stakeholders that have over 8 per cent shares in the IDBI Bank. The government will not participate in the open offer," a government official told The Business Standard. Under this arrangement, the acquiring company must make an offer to existing shareholders to buy an additional stake in the company. This route is also aimed at offering them an exit option, should any investor not be comfortable with the deal, perceiving potential risks in the business.
According to sources, the insurance behemoth will approach Sebi after getting approval from its board for acquiring the proposed stake in the state-owned bank.
On paper, the deal seems like a win-win situation for both parties. LIC has been looking to enter the banking space and acquiring a majority stake in IDBI Bank is expected to provide business synergies, despite the lender's stressed balance sheet. After all, it will get access to about 2,000 bank branches through which it can sell its products. According to the daily, the deal will not only allow LIC to deepen distribution but also help it to reduce operating costs and diversify.
On the other hand, for IDBI Bank the deal spells a much-needed cash infusion of between Rs 10,000 crore and Rs 13,000 crore. This capital support can go a long way in reviving the bank's fortunes. It is currently grappling with mounting toxic loans - its gross non-performing assets jumped to a staggering Rs 55,600 crore at the end of the March quarter - and posted a net loss of Rs 5,663 crore in the same period. That apart, IDBI Bank will also get access to accounts of about 22 crore LIC policy holders and stands to benefit greatly from the subsequent flow of funds.
However, what the proposed deal won't do is change the credit profile of IDBI Bank. According to a recent note by Icra, "Acquisition of stake by LIC, with equally strong ability to infuse capital, is unlikely to drive the credit profile in the near-term till there is an improvement in the standalone profile of the bank". The rating agency has an 'A' rating on IDBI Bank.
According to Anil Gupta, Icra's head for financial sector ratings, the additional stake acquisition "is likely to be done under the policyholder's accounts of LIC and, hence, even a 51 percent stake in the bank will not make IDBI Bank a subsidiary of LIC". He further noted that the stake will be transient in nature - since it will be an investment in the policyholders account - and "LIC will have to reduce its stake in the bank going forward and bring it down to the regulatory requirement of 15 per cent."
That is good news for the protesting IDBI Bank officers, who have opposed the proposed deal saying it is a clear move to privatise it. "The subjective move of the Government of India tantamount to reneging on the solemn assurance given by the then Finance Minister of the NDA Government on the floor of Parliament on December 8, 2003 that post conversion, the government shall at all times, maintain not less than 51 per cent of the issued capital of the Company. This solemn assurance given on the floor of Parliament forms part of the records of the Parliamentary Committee on Assurances formed the very basis for the ultimate passage of the IDBI (Transfer of Undertaking and Repeal) Bill, 2002," All India IDBI Officers' Association General Secretary Vithal Koteswara Rao said in a representation to Union minister Arun Jaitley earlier this month.
LIC employee unions are equally unhappy with the idea, alleging that it would be hurt the interest of policyholders and their premium money. The Federation of LIC Class-I Officers Association has reportedly pointed out that the insurer has been made to invest Rs 1,850 crore in PSBs in 2014-15 and Rs 2,539 crore in 2015-16. Citing past performance of these investments, the federation said that "There is considerable erosion in the share value of these banks which may affect our profitability also. In a way, we are forced to participate in the bank recapitalisation programme. The acquisition of a major stake in IDBI has to be viewed with concern in this context". Given the state of IDBI Bank, the unions anticipate it soaking up a significant amount of capital to clean-up its books and maintain minimum levels of regulatory capital, which will weigh down LIC.
"It should also be noted that no private investor has shown any interest in IDBI bank even though the government has been trying to sell equity for over two years now. Given the precarious situation of NPA in IDBI Bank and the intention of LIC to substantially raise its stake in the said bank, there is contagion risk on the policyholders' precious savings, which will grossly impact the capability of LIC to serve its policyholder," said All India LIC Employees Federation General Secretary Rajesh Kumar, adding that in the past few years LIC has been struggling to raise the bonus on the policies.
While everything seems up in the air currently, one thing is for sure: IDBI Bank will certainly be hoping for a favourable, speedy resolution. According to Gupta, the intent of LIC or the government on the long-term ownership structure will be key rating drivers for the lender, going forward.
With PTI inputs