The board of cash-rich Life Insurance Corporation of India's (LIC) on Monday approved a proposal to acquire a 51 per cent stake in IDBI Bank in a government-backed move aimed at bailing out the beleaguered lender, reeling under a staggering burden of bad loans.
LIC, which already owns a 7.5 per cent stake in IDBI, is expected to buy additional shares in the bank via a preferential issue, economic affairs secretary, Subhash Chandra Garg, told journalists.
"If needed, the insurer will make an open offer to minority shareholders in the bank, but that would not be material as the public shareholding in the bank is very low at around 5 per cent," said Garg, who is on the board of LIC.
The next step for LIC is to approach markets regulator Sebi, as the bank, which is also state-owned, is a listed entity. Insurance regulator IRDAI has already given its approval to the insurer for the stake purchase.
Garg said that the issue of preferential shares would be the likely way forward as it would provide funds to cash-strapped IDBI Bank. "The alternative is that they can buy shares from the government but that does not provide capital to the bank," he added. Garg did not divulge any details about the price at which the IDBI stake would be sold to LIC.
However, sources said that the LIC stake buy will help the bank get capital support of Rs 10,000-13,000 crore. With acquisition of majority stake, LIC will be able to appoint at least four members on the bank's board. The government, which has an 86 per cent stake in IDBI, has in the past wanted to privatise IDBI by ceding control, but its plan did not succeed due to the bank's deteriorating financial condition.
The RBI has initiated a so-called prompt corrective action on IDBI Bank, which has the highest bad-loan ratio among banks in the country, and 10 other public sector banks. LIC, fully owned by the Indian government, is typically a big investor in share sales including initial public offerings of public sector companies.
LIC, on its part, expects the acquisition of IDBI Bank to provide business synergies despite the lender's stressed balance sheet. It will get about 2,000 branches through which it can sell its products, while the bank would get massive funds of LIC. The bank would also get accounts of about 22 crore policy holders and subsequent flow of funds once the deal goes through.
IDBI Bank which is struggling to survive with gross non-performing assets rising to a whopping Rs 55,600 crore at the end of the March quarter, will get the desperately needed funds to revive its fortune.