EXPLAINER

The story so far: State-owned Life Insurance Corporation of India’s (LIC) draft red-herring prospectus (DRHP) listed IDBI Bank under ‘Risk Factors’. With the insurance company heading for an IPO, its approach in dealing with IDBI Bank would acquire more attention. Presently, the bank is an associate of LIC, with the latter owning 49.24% of the bank.

How are IDBI Bank and LIC related?

LIC acquired about 82.8 crore outstanding equity shares in IDBI Bank on January 21, 2019. The transaction resulted in the insurer gaining 51% ownership of the bank. In November 2018, the Reserve Bank of India (RBI) granted approval to LIC for acquiring additional equity shares to initiate remedial measures and restore the bank’s financial health. The insurance company infused a total of ₹4,743 crore into the bank on October 23, 2019, using policyholders’ fund. Further, LIC mentions in its DRHP, that the bank has raised approximately ₹1,435.1 crore by issuing shares to the public via Qualified Institutional Placement (QIP).

In December 2020, IDBI Bank was reclassified as an associate company when the corporation opted to reduce its stake in the bank to 49.24%. A subsidiary refers to a business where the parent company holds a majority stake. Associate refers to a business where the parent company holds a minority position.

LIC’s DRHP stated that IDBI Bank had emerged out of the corrective framework, as put forth by regulations of the RBI, since March 10, 2021.

The Cabinet Committee on Economic Affairs, in May 2021, gave its in-principle approval for strategic disinvestment and transfer of management control of the bank. The committee expected the strategic buyers to infuse funds, new technology and best management practices for the growth of the IDBI Bank. Additionally, the committee expected the strategic buyer to reduce the bank’s dependence on LIC.

The Government of India has a 45.48% stake in the IDBI Bank.

Why is IDBI seen as a ‘risk factor’?

LIC has stated in the DRHP that IDBI Bank does not need further capital infusion at present. However, it would be required to infuse additional funds in case the bank requires additional capital prior to the expiry of the applicable five-year period and is unable to raise capital. The state-owned insurer stated this would have an adverse effect on its financial condition and results of operations.

Moreover, the RBI had stipulated while granting approval that either of its associates, i.e., IDBI Bank or LIC Housing Finance would have to cease their housing finance business within a period of five years from the date of approval. The norms stipulate that the housing finance business can only be conducted by one entity. This could potentially put the corporation in contravention of the provisions laid out under Regulation 7B of the SEBI Mutual Fund Regulations. It states that any shareholder holding 10% or more of the shareholding or voting rights in an asset management company or the trustee company of a mutual fund directly or indirectly cannot possess more than 10% shareholding or voting rights in any other asset management company or mutual fund.

What next?

Ratings agency ICRA (Investment Information and Credit Rating Agency) states that IDBI Bank has seen an improvement in its capital position. It adds that the current capitalisation of the bank is sufficient for regulatory and growth requirement. Therefore, ICRA expects that there won’t be any material dependence on LIC for capital requirements. IDBI Bank had reported a 53% increase in net profit on a year-on-year basis at ₹578 crore in the third quarter of the current financial year.

“Further, as part of the strategic disinvestment, a new promoter group is likely to step in, which means that both the Govt. of India and LIC will have to substantially reduce their shareholding from the existing level of about 94%,” ICRA says. It elaborates that the reduction in shareholding could be through a combination of fresh capital infusion by the new promoter group and also by way of a partial stake sale by both the Government and LIC.

“Subsequent to the disinvestment, it is expected that neither the Govt. of India nor LIC would remain a part of their promoter group of the bank and any capital requirement in future would be driven by plans of the new promoter group,” according to ICRA.