The Insurance Regulatory and Development Authority of India (Irdai) on Friday approved a proposal by Life Insurance Corporation of India (LIC) to raise its stake in IDBI Bank up to 51% from the current 10.82%, giving the country’s largest insurer special relaxation from its 15% holding cap for insurers in a single firm. The deal will save the government from having to infuse more funds into IDBI Bank, which had received as much as Rs 10,610 crore last fiscal, the most by any public-sector bank (PSB). However, analysts said it will test the resolve of regulators who may have to extend a series of such special waivers for LIC for the deal to go through. Also, analysts feel the deal to acquire the stressed bank could also cast clouds on LIC’s fiduciary duty to its millions of policyholders.
It is not immediately clear whether the deal involves fresh equity infusion by IDBI Bank or a direct sale of the government’s stake in the bank that currently stands at 81%.
A senior Irdai executive told: “We have also asked LIC to decide by when it plans to reduce its stake below the regulatory limit of 15% (once its acquisition of more stake is over). This decision will be taken by its board of directors.”
Analysts said the LIC-IDBI Bank deal will lead to a series of exemptions to be given by three regulators — Irdai, the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI). LIC needed an exemption from relevant provisions in the Insurance Laws (Amendment) Act, 2015, and the Life Insurance Corporation Act, 1956, that bar insurers from holding more than 15% in any company. Even Section 35 of the Insurance Act restricts a life insurer from acquiring control in a non-insurance entity.
The additional stake would cost LIC more than Rs 9,000 crore. While it was reported that LIC could infuse Rs 13,000 crore into IDBI Bank, the lender on Friday informed the stock exchanges that “no such discussion has taken place” in its board.
Despite massive infusion by the government last fiscal, IDBI Bank’s core equity capital stood at 7.42% as on March 31, just above the minimum regulatory requirement of 7.37%. Its gross non-performing assets (NPAs) zoomed to 27.95% and net NPAs to 16.69%, the most reported by any PSB.
Having fallen as much as 16% in the past one month, shares of IDBI Bank surged over 10% on Friday amid reports of the acquisition of a majority stake by LIC. The share jumped almost 12% in intra-day trade before shedding gains.
Speaking to a business news channel, VG Kannan, chief executive, Indian Banks’ Association (IBA), said that it is to be seen in what ways the deal will improve the capital of the bank; if the investment is going to come by way of additional funding or whether it will only be the sale of existing shares to LIC. “These modalities will have to be seen. If it is a government sale to LIC then it does not improve the capital of the particular bank,” he said. He added that this is probably the first instance where an insurance company might become the majority owner of a bank, which, Kannan said, he is a bit concerned about.
Meanwhile, the RBI has initiated a prompt action (PCA) on the bank, restricting its lending to only low risk-weighted assets (RWA). In the March quarter of 2017-18, IDBI Bank reported a net loss of Rs 5,662.76 crore, wider than the Rs 3,199.8 crore loss reported in the same period last year, owing to an 80% year-on-year jump in provisions.
Nevertheless, Irda’s board meets in two days, when it will presumably take a call on whether an exemption can be granted in this case.
Sebi will require to exempt LIC from making an open offer to minority shareholders, along the lines of a similar move when it permitted Oil & Natural Gas Corporation to buy the government’s 51% stake in Hindustan Petroleum Corporation last fiscal. However, as pointed out by analysts, any such move erodes the faith of minority shareholders in state-run enterprises and could hurt the government’s future privatization initiatives. Since 10 more banks are under the central bank’s PCA framework, along with IDBI Bank, this bailout could spur similar demand from the government to LIC to replicate such efforts in future again. This will be against the spirit of good corporate governance. Also, both LIC and IDBI Bank have their own mutual fund ventures. It’s not yet clear how the regulator will ensure any conflict of interest.
In the Budget for 2016-17, the government had said it could consider trimming its stake in IDBI Bank below 50%.