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India to allow foreign funds to own over 51% in IDBI Bank

Ahead of the December 16 deadline for submission of expressions of interest (EoIs) for 60.72% stake in IDBI Bank, the government on Tuesday issued a set of clarifications, seeking to allay the concerns of potential investors. It said a consortium of foreign funds and investment vehicles can own more than 51% in the lender and that it would continue primary dealer business even if a foreign bank acquires a majority stake in it.

As per the extant FDI policy, the aggregate foreign investment in a private bank from all sources is allowed up to a maximum of 74% through the ‘approval route’.

Responding to the last batch of six investor queries, the department of investment and public asset management (Dipam) also said that the government in consultation with the Reserve Bank of India could consider relaxing the five-year lock-in period for 40% stake applicable to the promoter of a private bank, in case a bank/non-banking financial company is merged with IDBI Bank.

According to the lock-in condition, if an NBFC is merged into a private bank, the stake of the bidder/consortium can’t be reduced to less than 40% even though none of the shares originally acquired have been sold.

According to RBI regulations, the potential buyer has to lock in a 40% stake in a private bank for five years before reducing thereafter as per a glide path. As per the EoI guidelines for IDBI Bank, the glide path is rather easy to comply with, as it requires the new promoter to bring down the stake to 26% in only 15 years.

The preliminary information memorandum for EoI has stated that a foreign bank or fund/investment vehicle incorporated outside India could bid for IDBI Bank. Before floating the EoI, Dipam had taken RBI’s nod for the transaction as, under regulations, stake sales of 10% or more to private equity require the RBI nod. RBI’s approval is based on its “fit and proper” assessment.

Investors had queried whether the residency criteria stipulated for ‘Promoter’ under the 2016 Licensing Guidelines of RBI for ‘on tap’ Licensing of Universal Banks would apply to funds/investment vehicle incorporated outside India and whether such non-residents can own more than 51% of IDBI Bank.

“IDBI Bank is an existing banking company; hence, for the Transaction, the said residency criteria (applicable on new/prospective banks) would not apply to a consortium consisting of funds/ investment vehicle incorporated outside India,” Dipam said.

According to RBI regulations, promoters of new banks have to be residents of the country, but this provision does not apply to existing private banks.

On October 7, the Centre invited EoIs for IDBI Bank and offered to sell a total of 60.72% stake in the bank, including 30.48% from the government and 30.24% from LIC, along with the transfer of management control in IDBI Bank. Both the government and LIC together will have a 34% residual stake in the lender (19% by LIC and 15% by the government), but give a free hand to the new promoter to run the business.

To another query, Dipam said IDBI Bank could continue its primary dealer business even if a foreign bank acquires a majority stake and management control in the bank. “There may not be any impact on the primary dealer business of the IDBI Bank.”

As reported by FE earlier, IDBI Bank will continue to operate as an ‘Indian private sector bank’ after its strategic sale and the government’s residual 15% stake in the lender post privatisation will be considered as ‘public shareholding’. Besides, the new owner would have the leeway meet the minimum public shareholding norm over an extended period (instead of the usual 1 year) and could undertake corporate restructuring of its subsidiaries.

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LIC To Retain Partial Stake In IDBI Bank, Says Chairman

LIC will retain partial stake in IDBI Bank

New Delhi:

State-owned Life Insurance Corporation of India (LIC) has said that it will retain part of its stake in IDBI Bank to reap the benefits of the bancassurance channel.

Along with the government, Life Insurance Corporation (LIC) will also divest its stake in IDBI Bank, but may not exit completely, LIC Chairman M R Kumar said in an interview.

LIC is currently doing roadshows for its maiden public issue, which opens for subscription on May 4.

The government for the past few years has been planning to sell its 45 per cent minority stake in IDBI Bank to strategic investors as part of its privatisation drive.

Last week, the Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey had said the IDBI Bank privatisation process was underway and that the quantum of the stake sale would be determined after the completion of the roadshow.

IDBI Bank became a subsidiary of LIC with effect from January 21, 2019, following the acquisition of an additional 82,75,90,885 equity shares.

On December 19, 2020, IDBI Bank was reclassified as an associate company due to the reduction of LIC shareholding to 49.24 per cent following the issuance of additional equity shares by the bank under a Qualified Institutional Placement (QIP).

“Strictly speaking, we are below the threshold limit of management control but then, what government really means is that management control is to be given in such a way that a private entity picks up and runs the bank, and government in the process gets value out of that,” Mr Kumar said.

He further said that “since LIC is also in the picture, my stand has always been very clear that we will also divest along with the government, but it may be 49 per cent. So, it will depend on how this whole transaction plays out and what kind of investors express interest”.

He further said LIC does not want to “hold a big stake” but some holding as it has been a win-win for both entities.

IDBI Bank has been the strongest contributor to the bancassurance channel, he said, adding for the bancassurance arrangement to continue LIC may not require to hold the entire stake.

Bancassurance is an arrangement between a bank and an insurance company, allowing the latter to sell its products to the bank’s customers and others through the branch network.

In the last three years, the bank has gained a lot in terms of savings accounts, cash management, and premium collection, he said.

“Once you’ve seen the result of fee-based income coming out of this (arrangement), once the board has recognised that this fee-based income is going to grow, the bank would also like to have continuity in the relationship,” the chairman noted.

LIC had bought a 51 per cent stake in IDBI Bank in 2019 for Rs 21,624 crore at an average price of Rs 61 per share. However, IDBI Bank scrip is trading much lower at Rs 45 per unit, indicating investment loss for the insurer.

Besides, it infused Rs 4,743 crore in IDBI Bank on October 23, 2019, using policyholders’ funds while the bank further raised Rs 1,435.1 crore on December 19, 2020, by way of a QIP.

IDBI Bank has come out of the prompt corrective action framework in March 2021, subject to compliance with certain conditions and continuous monitoring.

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