LIC PERMITTED 51% STAKE IN IDBI BANK

The Insurance Regulatory and Development Authority of India (IRDAI) board on Friday approved Life Insurance Corporation´s investment in IDBI Bank, thus permitting LIC to own up to 51 per cent in the long-suffering lender.

This precisely means that LIC will now be able to pump Rs. 100130 billion into IDBI Bank in tranches through a preferential allotment of new equity shares at a price determined by a formula under the Securities and Exchange Board of India´s (SEBI´s) rules.   Conditions stipulated are:

• IRDAI has come out with some caveats and advised the insurer to bring down its stake in IDBI Bank over a period of five to seven years.
• The regulator has asked LIC to submit a plan with a timeline for paring its stake in the bank.
• LIC sources maintain that it will only be an investment for the insurer.
• It is believed that LIC would remain a strategic investor in the bank and it will not control the bank´s management. However, the insurer will appoint one or two directors to the bank´s board.

Further, the deal comes with several regulatory challenges:

1. It will trigger an open offer as LIC will acquire more than a 26 per cent stake in the fresh issue.
2. Further, it is not clear whether LIC´s shareholding will be considered public shareholding.  IDBI Bank´s current public shareholding, at around 19 per cent, is below the SEBI mandated 25 per cent.
3. LIC and IDBI Bank would need to seek clarification on both issues from the market regulator.
4. LIC, which holds stakes in several banks, will also need the Reserve Bank of India´s (RBI´s) approval to own such a large stake in IDBI Bank.
5. Both IDBI Bank and LIC own mutual fund arms, which too are not allowed under the Sebi rules.
6. LIC will also end up owning a stake in IDBI Federal Life Insurance after this purchase, which will be a breach of IRDAI´s regulations. IRDAI may already have considered this issue before giving the clearance.

Conclusion:

• Experts are optimistic on LIC getting all due regulatory clearances as it is a Government owned institution, which has rescued ailing public sector banks in the past too.
• Ofcourse, it is termed to be a radical decision and one could sense that there was an element of urgency as public sector banks are going through a tough time.
• Also, it will be interesting to see how the working scenario would change at the bank on various fronts, such as their Business Practices, Corporate Governance, and so on.