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:
- It will trigger an open offer as LIC will acquire more than a 26 per cent stake in the fresh issue.
- 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.
- LIC and IDBI Bank would need to seek clarification on both issues from the market regulator.
- 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.
- Both IDBI Bank and LIC own mutual fund arms, which too are not allowed under the Sebi rules.
- 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.
- 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.