Cabinet Clears LIC’s Acquisition Of 51% Stake In IDBI Bank

The central government will give up its promoter status and management control in IDBI Bank Ltd. after Life Insurance Corporation of India acquires 51 percent in the lender.

The Cabinet approved lowering the government's stake in IDBI Bank below 50 percent, clearing the decks for LIC to acquire a controlling stake in the debt-ridden lender, Finance Minister Piyush Goyal said at a press conference in Delhi today.

“The deal will be a win-win for both LIC and IDBI Bank,” Goyal said. “The shareholders will benefit from the synergies.”

The government allowed LIC to buy 51 percent in IDBI Bank through a preferential allotment and an open offer, a government official told BloombergQuint on the condition of anonymity. The transaction will give promoter rights to LIC, the official said.

The Ministry of Corporate Affairs and the Competition Commission of India have given in-principle approval, the official said. After the deal, IDBI Bank will be a subsidiary of LIC, and give the life insurer a strong boost through bancassurance, according to the official.

The state-run insurer is buying stake in the bank when close to a third of its assets are stressed, according to India Ratings. Its deteriorating financial condition has led to multiple ratings downgrades from Fitch, ICRA and S&P. The bank does not have enough capital to make provisions against these bad assets. However, Moody's Investors Service said it will review IDBI Bank's long term ratings for a possible upgrade, following LIC's plan to increase its stake in the lender to over 51 percent.

The bank had sought the government's approval for considering bringing LIC on board in the role of a promoter, it had said after its July 17 board meeting. LIC will have a larger role to play in the state-owned lender, IDBI Bank's Managing Director and Chief Executive Officer B Sriram had said. “The intent is to take the management control.”

The life insurer will have to dip into its policyholders' accounts for funding the stake buyout. But that's not a problem, according to former LIC Chairman SB Mathur. “The policyholders' money is invested over a long period of time. We have a tenor of LIC policy of over 10 years,” Mathur told BloombergQuint. “That's a fairly long period and policyholders may ultimately benefit. Even fixed debt investments are for 15-20 years.”

LIC To Pare Stake In Other Banks?

LIC may have to bring down its stake in other banks to 10 percent over a period to avoid any conflict of interest, the official quoted earlier said. The insurer owned more than 10 percent in at least six banks and it has to be brought down to 10 percent, according to RBI guidelines, the official added.

Apart from holding equity in banks, LIC invested in debt securities issued by banks, including additional tier-1 bonds.

Shares of IDBI Bank, which rose the most in three weeks in early trade, closed 5.61 percent higher at Rs 62.15 apiece on the BSE.