Life Insurance Corporation of India board on Monday gave its approval to buy 51 per cent stake in debt-ridden public sector lender IDBI Bank Ltd. Department of Economic Affairs Secretary Subhash Chandra Garg, who was also a part of the LIC board representing government, told media persons that the since the bank needs funds, the LIC would choose preferential share route to increase its stake. Experts say LIC could get at least four seats in the IDBI Bank board. Currently, the government holds 81 per cent stake in IDBI Bank.
Garg also said that since the combined shareholding of both the government and LIC would be over 90 per cent, and that public shareholding is too low, an open offer might not be on the cards. He, however, clarified that LIC could make an open offer if needed. The deal would now have to be approved by both the Cabinet as well as the IDBI Bank board. Experts say there might not be an open offer, and acquisition, as Garg said, would happen by issuing preferential shares.
According to the takeover plan approved by the Insurance Regulatory and Development Authority (IRDA), the state-owned insurance company would not have any management control over the state-owned bank. Also, LIC would present a comprehensive plan to reduce its stake to 15 per cent over a period of the seven years.
RK Nair, former member IRDA, told CNBC TV 18 that though the LIC board has given the approval of strategic takeover in IDBI Bank, no guidelines have been issued about the divestment plan in the next five-seven years, which he said, might come from the IRDA.
On the issue of investment duration, he said LIC would be a long-term investor, which he said would be coming from its live fund. He said with a good management team, IDBI bank could be easily turned around.
While LIC already owns 10.82 per cent of IDBI Bank, acquiring another 41 per cent equity for majority 51 per cent equity will cost another Rs 9,408 crore, though its eventual cost of acquisition may be five-seven times higher. The IDBI Bank has the highest gross non-performing assets (27.95 per cent) as a percentage of total loans among all public sector banks. It has accumulated losses of over Rs 17,000 crore. The public lender has reported losses of Rs 8,237.92 crore in FY 18, Rs 5,158.14 crore in FY 17 and Rs 3,664.80 crore FY16.
Besides, IDBI Bank is already under banking regulator RBI's prompt corrective action (PCA), which restricts the bank's ability to expand loan business; requires it to shed non-core business and focus on returning to profitability by cutting expenses. Out of its total outstanding loans of Rs 1.99-lakh crore, it already has recognised gross NPAs worth Rs 55,588 crore while it has already provisioned for NPAs worth Rs 26,902 crore. With such high NPAs, the health of its other loan outstanding is also being questioned.
LIC has been looking to enter the banking space by acquiring a majority stake in IDBI Bank as the deal is expected to provide business synergy despite the lender's stressed balance sheet. The insurance giant will get about 2,000 branches through which it can sell its products. The bank will get accounts of about 22 crore policyholders and subsequent flow of fund.