Irdai will set timeline for LIC to scale-down stake to 15% in IDBI Bank

Insurance regulator Irdai will set a timeline for the Life Insurance Corporation of India (LIC) on how it must go about reducing its stakeholding from 51 per cent to 15 per cent eventually in IDBI Bank, said Subhash Khuntia, Chairman of the Insurance Regulatory and Development Authority of India (Irdai). He did not specify when the regulator will announce the timeline.

Once the proposed acquisition of the bank is completed in the coming months, the insurance regulator will provide a timeline for LIC to scale-down its holding in the bank back to 15 per cent.

LIC currently has a 7.98 per cent stake in IDBI Bank with the Government holding standing at 85.96 per cent. The life insurer wishes to increase its stakeholding in the Bank, given its network and institutional strength, at an investment of around Rs 100-130 billion.

The company will receive promoter status and management control post-acquisition.

The Board of IDBI Bank met last week and approved a proposal that sought shareholders' nod for preferential issue of equity capital aggregating up to 14.90 per cent of the lender’s post issue paid up capital. And on Tuesday, the Board of Directors of LIC met this week and finalised the contours of the proposed acquisition.

Subhash Chandra Garg, Secretary of the Department of Economic Affairs, recently said that LIC’s board has finalised the time-table for the completion of the deal. Further, he said that the board is mulling over whether to make an open offer to the bank’s minority investors or seek an exemption from the Securities and Exchange Board of India (SEBI).

Garg, who is on the LIC board, said that the market regulator will ultimately decide whether there will be any exemption to existing regulations.

In June, the insurance regulator had allowed LIC to go ahead with the stake buy in by relaxing regulatory rules that sets a cap of 15 per cent on equity shareholding by an insurance firm in another company.

In August, the cabinet approved LIC's proposed acquisition of up to 51 per cent stake in the bank.

IDBI Bank’s employees have moved the Delhi High Court to look into the proposed acquisition of 51 per cent stakeholding in the bank by LIC and the approval of the deal by the insurance regulator.

“We have responded to the court saying that IRDAI has powers to give a relaxation in specific cases where it is justified. LIC has said that it is in their interest to expand as they would like to have synergy with IDBI Bank, therefore some relaxation on rules in this case,” said Khuntia.

This is a relaxation of Irdai rules only in the LIC-IDBI Bank case and is not an indication of a broad regulatory change. Exemptions to Irdai rules will be given depending on specific cases, he said.

For over the past decade, LIC has wanted to enter the banking industry but the insurer did not receive approval from the Reserve Bank of India (RBI) many a time. The acquisition of IDBI Bank will propel those ambitions of the life insurer.

While there are several approvals still pending from the main regulators, namely Irdai, Sebi, CCI and RBI, through a preferential share issue LIC will increase its stake in the bank by an additional 7 per cent, to 14.9 per cent.

The capital infusion will help IDBI Bank meet the Basel-III norms given that a substantial portion of its assets have been recognised as ‘bad assets’ or Non-Performing Assets (NPAs), thereby depreciating the value of its lending book and increasing its need for capital.

At the end of FY2018, IDBI Bank’s losses grew to Rs 82.4 billion as against Rs 51.6 billon in FY2017. Gross NPAs nearly doubled to Rs 555.9 billion at the end of FY2018.

The biggest concern lies with the outcome of the ongoing case at the Delhi High-Court, which could prove to be an obstacle if the court finds no merit in the deal, especially in the present case where one public sector giant (insurer) is buying another (bank).