LIC likely to buy substantial stake in public sector lender IDBI Bank.
The country’s largest insurance company, Life Insurance Corporation of India (LIC), is likely to buy a ‘substantial’ stake in IDBI Bank. While this could be a move by the government to help clear off debt of the bank, how the structure of the deal will pan out will be closely watched by market participants.
LIC has been often regarded as the ‘white knight’ of the disinvestment programmes of the government and has helped several such offers sail through, be it the NTPC stake sale or the SBI mega QIP in 2014. Even state-owned entity IPOs like that of Hindustan Aeronautics, General Insurance Corporation of India and New India Assurance have seen heavy investments from LIC.
According to the IRDAI Investment norms, a company cannot hold more than 15 percent in one single entity, LIC has been given an exception in some cases. These are companies which the insurance giant has labelled as ‘legacy’ investments and have been given additional time to bring down their stake to below 15 percent.
In the case of IDBI Bank, while LIC already holds 10.82 percent equity stake, a ‘substantial’ stake would mean that their holding could well exceed the open offer trigger limit of 25 percent. How the insurance regulator would react to this proposal will be looked at.
When Max Life Insurance was to merge with HDFC Life, a structure was proposed wherein Max Life would merge with its holding company Max Financial Services, which would subsequently merge with HDFC’s life insurance arm. Here, the insurance regulator had raised objections to the deal, invoking Section 35 of the Insurance Act, 1938.
The provision says that an entity not in the business of insurance, cannot be merged with an insurance entity. If this particular section is referred to, it is not clear how IDBI Bank can be acquired by LIC.
What sort of a special dispensation will be given to this prospective deal needs to be studied. In the past, LIC has said on a few occasions that in a few cases, the LIC Act holds precedence over the IRDAI Act. Will this be applicable to the deal? It remains to be seen.
The IRDA Act 1999 deals with the powers of the regulator to issue guidelines to insurance companies and to promote and develop activities pertaining to the sector. The LIC Act 1956 deals with the powers of Life Insurance Corporation, its roles, responsibilities and functions.
Time and again, LIC has been labelled a ‘bailout agency’ of the government, though the entity has always maintained that these were decisions it took on the merits of the particular issue and the price being offered.
When it comes to IDBI Bank, it is not clear as to what rationale will be used by LIC’s investment team for the acquisition decision.
IDBI Bank’s net loss widened for the March quarter to Rs 5,662.76 crore YoY on weakening asset quality and rise in provisions. During the quarter under review, IDBI Bank’s provisions for non-performing assets rose by 77.9 percent to Rs 10,773.30 crore as against Rs 6,054.39 crore in the year-ago period.
Similarly, the percentage of gross non-performing assets (NPA) jumped to 27.95 percent in Q4FY18 compared to 21.25 percent a year ago. Net NPA also jumped to 16.69 percent in the March quarter over 13.21 percent a year ago.
The first step for LIC will be to clear bad debt. This can be done from the funds in its shareholder accounts. Next, will be the process to restructure the business.
A lot of questions come up on the probable acquisition of stake by LIC. Apart from regulatory nods that could take several months, what exactly will LIC do with this acquisition and whether there could be an amalgamation with its housing finance entity or if this will fulfill its dream of having a bank, remains to be seen.
While the market waits with baited breath for the announcement to take place, analysts have started calculations on how big an entity LIC will potentially become after it has a bank on board. Once this happens, calls to list this entity could only become louder.
