LIC holds the key in Govt’s IDBI Bank stake sale

 

In the last 14 months or so, IDBI Bank’s market price has been lower than the price LIC paid to increase its stake in the Bank

Will the Life Insurance Corporation of India (LIC) sell a portion of its shares in IDBI Bank, just so that the Government can complete strategic disinvestment of its stake in the Bank in FY22?

Left to its own devices, the Corporation may not want to do it.

Reason: the current market price of IDBI Bank is much lower than the price LIC paid in FY2019 to up its stake in the Bank from 10.82 per cent to 51 per cent.

LIC hiked its stake in IDBI Bank in FY2019 in three tranches -- at ₹61.73 per share via preferential allotment in October 2018 and ₹60.73 per share via preferential allotment in December 2018 as well as in January 2019. IDBI Bank’s shares closed at ₹36.30 apiece on BSE last Friday.

In the last 14 months or so, IDBI Bank’s market price has been lower than the price LIC paid to increase its stake in the Bank.

The state-owned life insurance behemoth invested a whopping ₹21,624 crore (of policy holders’ money) for hiking its shareholding in the Bank. So, it will definitely want a good return on this investment.

Being a public financial institution, the Corporation’s investments are under the scrutiny of lawmakers. If a sale happens below the acquisition price, it will be frowned upon by the stakeholders.

As at December-end 2020, LIC and the Government held 49.24 per cent and 45.48 per cent stake, respectively, in IDBI Bank.

Controlling stake

The Government is planning to completely divest its stake in IDBI Bank to a strategic investor. But the investor may want to hold more than 51 per cent stake (higher than LIC’s stake) in the Bank. So, the only way this can happen is if the Corporation sells a portion of its stake to the investor.

Among the synergies IDBI Bank has achieved with LIC include premium collection (which gives the Bank float money), sale of insurance products (fetches fee income), appointment of LICHFL-Financial Service Ltd (LICHFL-FSL) as corporate direct selling agent for sourcing of MSME and agriculture loans and select structured retail assets (auto, personal & education Loan).

Given that IDBI Bank is reaping the benefit of its synergy with LIC, the new investor may want to continue this mutual synergy which has created a single window for customers to avail banking and insurance services.

Wiggle room

LIC may get wiggle room to pare its stake in IDBI Bank once the Bank complies with the profitability criteria (Return on Assets/RoA) to come out of Prompt Corrective Action (PCA). The Reserve Bank of India invoked PCA against IDBI Bank in 2017 in view of high non-performing assets and negative return on assets.

Under PCA, a bank's branch expansion is restricted and lending is narrowed to relatively less risky segments to nurse it back to health.