LIC stated in the DRHP that IDBI Bank does not currently require any further capital injection. However, additional resources would be required if the Bank requires additional capital before the end of the applicable five-year period and is unable to raise capital. The public insurer stated that this would have a negative impact on its financial condition and results of operations. Second, it completely ignores the systemic issues that this transaction raises. Is it acceptable for a too-big-to-fail company like LIC to be allowed into the banking business? In the past, in 2015 and 2016, when the life insurer stepped in and invested in state-owned banks by participating in preferred share issuances, RBI publicly highlighted risks to financial stability. However, this type of defence ignores two main counter-arguments. First, it is possible to recognize that the IDBI deal is essentially a case of throwing money after the wrong one – even if the acquisition does not threaten the existence of LIC or will not destroy the funds of the insureds. Life Insurance Corporation of India (LIC) is a state-owned insurance group, with life insurance being the main business sector among other investment plans. It is also one of the leading institutional investors in India.
The Industrial Development Bank of India (IDBI Bank Limited or IDBI Bank or IDBI) acts primarily to provide loans and other financial opportunities for the development of emerging industrial industries. The sanction to increase its stake in IDBI to 51%, LIC received the necessary sanctions out of 21. January 2019 by the Insurance Regulatory and Development Authority of India (IRDAI), taking into account the deteriorating condition of IDBI Bank. On January 21, 2019, LIC completed the acquisition of 51% of IDBI Bank, becoming the majority shareholder of IDBI Bank. For this reason, the Reserve Bank of India (RBI) has reclassified IDBI Bank as a private sector bank for regulatory purposes, effective January 21, 2019, according to a press release dated March 14, 2019. This has proven to be an ideal solution to solve the twin problems of divestment and budget deficit while leaving some PSUs in deficit. “After the divestiture, neither the Indian government nor LIC is expected to remain part of their promoter group of the bank and capital requirements in the future will be determined by the plans of the new group of promoters,” CIFAR said. Even though the deal is being criticized on several fronts, including employees in the insurance and banking sectors, it will be exciting to see the implementation of the deal in support of LIC and IDBI. The synergies of the two combined can be an example of a significant turnaround. At the time, Mundra and the RBI also pointed to another problem: allowing Indian state-owned banks to rely on LIC for easy capital is a moral hazard issue.
Finally, the main reason for their dependence on low-income countries is that they are clearly unable to raise the same capital in the markets. In addition to maintaining profitability, it will also help generate cash, which is all the more necessary due to the strict provisioning requirements for non-performing loans. The bank has offered to sell its stake in 19 unlisted companies, and it also owns 19% of the shares of ARCIL (Asset Reconstruction Company), IDBI Federal Life Insurance Company (life insurance players). The IDBI needs to be renovated and refurbished to a high standard to return to normal. To do this, IDBI should identify its niche areas and start working on them. Nevertheless, due to its manageable size and the new PSB landscape, IDBI Bank has a competitive advantage and therefore needs to pull itself together and move. The preliminary information memorandum (PIM) issued by DIPAM on the privatization of IDBI Bank also states that private sector banks, foreign banks, non-bank financial companies registered with the RBI, alternative investment funds (AIFs) registered by Sebi, an investment fund/vehicle established outside India, may bid individually or in consortium. On the other hand, LIC is at least partially managed by the Insurance Regulatory and Development Authority (IRDA). IRDA has capped LIC`s stake in other companies at 15%, meaning that the life insurer cannot theoretically buy a 51% stake without permission (although legal experts believe there may be some leeway since the LIC Act, 1956, precedes the IRDA Act, 1999). IDBI, like many other banks, is burdened by rapidly rising losses and overcoming bad debts.
It suffered a net loss of Rs 3,602.49 crore in the September 2018-19 quarter. Gross non-performing assets reached 31.78 per cent (Rs 60,875.49 crore) of gross advances as of September 30, 2018, up from 24.98 per cent in the same period last year, according to the Economic Times. As a result, IDBI was designated by the RBI as a “WEAK BANK” and placed under the constraint of the bank`s Rapid Corrective Action Framework (SWIFT) on lending. Until the bank shows signs of improving its performance or promoting the quality of its assets, it should only be safely in retail banking. Under Sebi`s open offer policy, any acquisition of a total of 25% or more of shares of a publicly traded company or the acquisition of “control” requires the acquirer to make a takeover offer to minority shareholders. In December 2020, IDBI Bank was reclassified as a partner when the company decided to reduce its stake in the bank to 49.24%. A subsidiary refers to a company in which the parent company holds a majority stake. Partner means an entity in which the parent company holds a minority interest. Add to that the fact that IDBI currently doesn`t have a full-time CEO and managing director, that the RBI doesn`t expect to exit “immediate corrective actions” (BCPs) by 2020-21, and it`s unclear whether the bank is worth saving at this point. In its petition, the IDBI Bank of India Executives Association had claimed that the takeover would result in the loss of its status as a public sector bank and state-owned enterprise, which would affect the conditions of service of the bank`s civil servants. The petition says the deal violates Parliament`s commitment that the government should hold at least 51% of IDBI Bank`s issued capital. The sale will bring the government`s stake in IDBI Bank below 51% from the current 85.96%.
The government and LIC together hold 94.72% of IDBI Bank`s shares. Life Insurance Corporation (LIC) holds 529.41 crore of shares, representing a 49.24% stake in IDBI Bank, while the government holds 488.99 crore of shares, or 45.48%. Public shareholders hold 5.2% of the bank`s shares. The petition, filed by lawyers Prashant Bhushan and Pranav Sachdeva, further claimed that the takeover was not a financially prudent decision by LIC and would compromise its ability to pay its own policyholders. “The investment in question will be made from the funds of 38 CRE insureds of the LIC who have invested their hard-earned money to secure their own future. The said investment of the LIC will affect its own ability to pay its policyholders,” reads the petition. By allowing LIC to take its hands off it, the worst-performing public sector bank, it is no longer directly responsible for the headaches of the institution`s NPA and associated capital requirements. LIC had sought to enter the banking sector by acquiring a majority stake in IDBI Bank, as the deal aims to offer business synergies despite the lender`s tight balance sheet. LIC issues about 20 million policies per year. In total, it manages insurance contracts for at least 250 million people through 300 million life insurance policies and generates annual premium income of just over Rs 3 lakh crore. With respect to the capital injection, IDBI is unlikely to fall under government control, thus escaping government control and significant interference.
The most important concern, however, is that it can enjoy this position for a long time, as is sufficiently clear from past cases that LIC is used by the government in most cases to clean up other public sector enterprises, including banks. For all reasons, LIC is known as the government`s cash cow. This can hinder value creation for both LIC shareholders and IDBI Bank shareholders. “IDBI Bank and LIC have started to ensure that their synergies are fully exploited over the next 12 months. Improved financial health will pave the way for the early exit from corrective action (PCA) and will be a world-class bank that will stand the test of time. LIC and IDBI Bank are committed to serving the interests of all stakeholders,” the bank said. The insurer`s board of directors is expected to meet in the first week of September to take further steps toward acquiring a majority stake in the bank. One facet that should be prioritized at all costs is the quality of the assets. IDBI Bank`s gross NPAs are the highest among Indian banks at 27.47%. The Investment Information and Credit Rating Agency, ICRA, downgraded the bank two months ago, also blaming growing losses due to high spreads and loan provisioning.
In order to strengthen the asset portfolio, IDBI Bank is giving more thought to restructuring, credit policy and risk management aspects. The acquisition of IDBI Bank would be governed by FDI regulations, which allow 74% of foreign ownership in banks through approval and 49% through automatic channels. At all times, at least 26% of the paid-up capital of the bank must be held by residents.