IRDA approves IDBI-LIC deal; trade analysts jittery

The board of the Insurance Regulatory and Development Authority of India convened on Friday, 29 June and approved Life Insurance Corporation’s (LIC) proposal to increase its stake in troubled state-run lender IDBI Bank.
According to sources, IRDA has approved acquisition of up to 51% stake by LIC in IDBI Bank.
However, LIC needs to get a board-approved plan to bring down its stake to 15% over time. Now, the LIC board will have to consider the matter for approval.
In the fourth-quarter of fiscal 2017-18, IDBI Bank’s net loss widened to Rs 5,662.76 crore as a higher provisioning for non-performing assets (NPAs) hurt its bottom line. Gross NPAs rose to 27.95 percent of its loans at the end of March 2018, compared with 21.25 percent at the end of March 2017. In absolute terms, gross bad loans stood at Rs 55,588.26 crore as against Rs 44,752.59 crore on 31 March 2017. Provisioning for NPAs were raised to Rs 10,773.30 crore in the fourth-quarter of the fiscal ended March 2018, up from the Rs 6,054.39 crore parked aside in the year-ago period.
There is no clear logic as to why LIC is going for IDBI of all banks, apart from the fact that it is following the government’s orders. LIC already has a 10.83 percent stake in IDBI; it will effectively own a white elephant with an insatiable hunger for the taxpayer’s money.
“The next step is LIC has to go to [its] board and inform [the board about] the conditions under which the approval is given. What we have asked for is: what is going to be their plan for reducing the stake to 15% over a period,” highly-placed sources who are aware of the development said. The government, which is the promoter of the bank, holds almost 81%. IDBI Bank’s shares rose 10% to ₹54.90 on the BSE.
The deal will also require an approval from the Securities and Exchange Board of India will then trigger takeover regulations.
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As per capital market regulations, any company that acquires 25% stake in a listed entity has to make an open offer to acquire 26% additional stake from public shareholders.
However, the markets watchdog may waive the requirement for LIC as it has done earlier in matters involving the government and public sector entities. The proposed deal will also need Reserve Bank of India’s approval. The life insurer has harboured ambitions for a banking licence for a while. One of its subsidiaries, LIC Housing Finance, had applied for one in the previous round when RBI invited applications but it did not get a license.
Sources said if LIC acquires a significant stake in IDBI Bank, the latter will operate as a subsidiary of the insurer. Interestingly, the bank also has a life insurance arm, IDBI Federal Life Insurance Co. According to IRDA regulations, no entity can have two separate insurance companies.
IDBI Bank has been under the prompt corrective action framework of the RBI due to deteriorating financial health. Its loss widened to ₹8,238 crore in FY18 from ₹5,158 crore in FY17.