LIC board gives approval to acquire 51% stake in debt-ridden IDBI Bank

Life Insurance Corporation of India (LIC) came a step closer in acquiring a majority stake in the government-owned IDBI Bank as its board gave an approval to the deal on Monday.

LIC’s shareholding in IDBI Bank will stand at 51 per cent after it takes a series of approvals from the Reserve Bank of India, the Securities and Exchange Board of India (Sebi), the government and the bank’s board, Department of Economic Affairs Secretary Subhash Chandra Garg said. Garg is a director on the board of LIC, which owned around 7.98 per cent in IDBI Bank at the end of June. The government owned 85.96 per cent in IDBI Bank at the end of June.

Stock prices of IDBI Bank fell 1.48 per cent to close on the BSE at Rs 56.45 on Monday. LIC will have at least four directors on the board of IDBI Bank following the acquisition, an official said. The ailing bank will issue preferential shares to LIC to raise capital in one go.  

“IDBI Bank needs capital, so they will issue preferential shares. The other way is that they (LIC) can buy from the government but that does not provide capital to IDBI Bank. That’s why this (issuing of preferential shares) is the preferable mode to do it,” Garg said. IDBI Bank is expected to get Rs 100-130 billion from LIC through acquisition of stakes, sources said.

However, the government did not provide much clarity on the issue of LIC making an open offer to IDBI Bank’s shareholders.

“The open offer itself may or may not come about, as public shareholding is small. It is only about 5 per cent. The pricing formula may not be attractive. But they will go through that process. If necessary, they will make an open offer. It is not a very material issue in this context,” Garg said.

According to Sebi guidelines, an acquisition of more than 25 per cent in a listed entity is termed control and requires an open offer. Under an open offer, the acquiring company must make an offer to existing shareholders to buy an additional stake in the company. It is aimed at providing the shareholders an exit option as there may be a management change after acquisition and investors may perceive potential risks in the business.

According to a government official, LIC will be able to reduce operating costs, diversify,  deepen distribution, and create synergies between LIC’s distribution network and the bank’s network, “fulfilling the objective of providing both insurance and banking solutions”.

LIC will be able to sell its products through 2,000 branches of IDBI Bank and the bank will be able to utilise the funds of the insurance behemoth. The bank would also get accounts of about 220 million policy holders and subsequent flow of fund. 

The move will also help the bank access new funds as a result of payout of LIC claims.

IDBI Bank will become a subsidiary of LIC on the lines of LIC Housing Finance, LIC Mutual Fund and LIC Pension Fund.

LIC has a shareholding in all public sector banks and 13 private banks at present and it had investment assets worth Rs 25 trillion at the end of March 2017. On the other hand, IDBI Bank is in a bad shape with its gross non-performing assets (NPAs) soaring to 27.95 per cent of its loans at the end of March 2018. 

The bank reported a net loss of Rs 56.7 billion in the fourth quarter of last financial year due to higher provisioning for NPAs.

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