Shares of IDBI Bank rallied as much as 11 per cent in intraday trade on the Bombay Stock Exchange (BSE) on Tuesday after Union Cabinet approved one-time capital infusion of Rs 9,300 crore by both government and Life Insurance Corporation (LIC).
The Cabinet, chaired by the Prime Minister Narendra Modi, on Tuesday cleared recapitalisation of IDBI Bank, in which the government will infuse Rs 4,557 crore, and Life Insurance Corporation (LIC) will invest Rs 4,743 crore.
"The capital infusion will help in completing the process of IDBI Bank's turnaround and enable it to return to profitability and normal lending, and giving Government the option of recovering its investment at an opportune time," the Cabinet said.
This development follows Finance Minister Nirmala Sitharaman's declaration of an upfront capital infusion of Rs 70,000 crore to the public sector banks less than a fortnight ago.
On the Bombay Stock Exchange (BSE), IDBI Bank share price gained as much as 10.84 per cent to touch an intraday high of Rs 29.65 apiece from Friday's closing figure of Rs 26.75 in an otherwise weak market. Paring some of early gains, the stock closed at Rs 28.80, up 7.66 per cent.
IDBI Bank shares gained 5.78 per cent to settle at Rs 28.35 on the National Stock Exchange (NSE).
In contrast, the S&P BSE Bankex index ended 752.96 points, or 2.43 per cent, lower at 30,196.76 after Finance Minister Nirmala Sitharaman on Friday announced the merger of 10 public sector banks into four entities to make them stronger and sustainable as well as increase their lending ability. Shares of PSU bank stocks, including Punjab National Bank, Indian Bank, Oriental Bank of Commerce and Canara Bank fell between 5% and 9% in trade today.
Meanwhile, the benchmark S&P BSE Sensex plunged 769.88 points, or 2.06 per cent, to close at 36,562.91.
The stressed IDBI Bank, which reported a net loss of Rs 3,800 crore in the first quarter and put on credit watch by ratings agency S&P Global last month, needed a one-time infusion of capital to complete the exercise of dealing with its legacy book. After this capital infusion, IDBI Bank is expected to be able to subsequently raise further capital on its own and expected to come out of RBI's Prompt Corrective Action (PCA) framework sometime next year, as per the Cabinet statement.
IDBI Bank has already substantially cleaned up its balance sheet, reducing net non-performing asset (NPA) from peak of 18.8 per cent in June 2018 to 8 per cent in June 2019.
"This cash neutral infusion will be through recap bonds i.e. Government infusing capital into the bank and the bank buying the recap bond from the Government the same day, with no impact on liquidity or current year's Budget," it said.
Following cabinet's approval in August 2018, LIC completed acquisition of 51 per cent stake in IDBI Bank in January this year, while government continued to be a promoter and owned 46.46 per cent shares in the bank.
Edited by Chitranjan Kumar