Is the LIC-IDBI Bank deal a disinvestment?

Shishir Sinha/Richa Mishra New Delhi | Updated on July 12, 2018

Financial Services Dept guiding sale, but DIPAM eyeing proceeds

Can the Life Insurance Corporation (LIC)- IDBI Bank deal contribute to the government’s disinvestment booty? The Department of Investment and Public Asset Management (DIPAM), which has been kept out of the proposed deal, is looking at ways for the proceeds of the deal to come into its pocket.

The LIC-IDBI deal can be treated similar to the ONGC-HPCL transaction, where ONGC bought the government stake in Hindustan Petroleum Corporation Ltd, said an official in the know. The process and mechanism were defined by DIPAM then and the same could be adopted here, he told BusinessLine, adding “in the LIC-IDBI case, the Department of Financial Services (DFS) is taking the call on behalf of Central Government.”.

At present, the government holds 85.96 per cent equity in IDBI Bank and LIC has 10.82 per cent stake. Now, the government wants to bring its stake down to under 50 per cent. LIC has already got regulatory clearance to raise its stake. With the deal, LIC stake will increase to 51 per cent.

The insurance company is also preparing for an open offer as mandated by the SEBI Takeover Code — an acquirer has to make an open offer to the shareholders of the target company on acquiring shares or voting rights of 25 per cent or more.

But in the ONGC-HPCL deal, ONGC was exempted from the open offer, so, a similar exemption could be sought here as well, said another official.

DIPAM’s mandate

As per the present Allocation of Business rules, the mandate of DIPAM includes all matters relating to management of Central Government investments in equity, including disinvestment of equity in Central Public Sector Undertakings, and all matters relating to sale of Central Government equity through offer for sale or private placement or any other mode in the erstwhile Central Public Sector Undertakings.

Given this, a question that arises is whether IDBI Bank is a Central Government undertaking? According to information available on the IDBI Bank Website, Industrial Development Bank of India Ltd (IDBI Ltd) was incorporated as a Government company under the Companies Act, 1956 on September 27, 2004. Thereafter, the undertaking of IDBI was transferred to and vested in IDBI Ltd with effect from October 1, 2004. In terms of the provisions of the Repeal Act, IDBI Ltd has been functioning as a bank in addition to its earlier role of a financial institution.

But, will the transaction qualify as disinvestment? This, according to experts will depend on the deal structure. The buzz is that IDBI Bank will issue fresh shares which means expansion of equity base. On an expanded base, the government’s stake will come down without selling a single share. The government may consider selling shares at an appropriate time when it gets better valuation. Another thinking is that the entire government stake will be bought by LIC and there will be no fresh equity. One has to wait till the fine print is out, said an official.

At present, the deal structure is such that only DFS is involved. Besides, DFS deals directly with the insurance and banking sector.

The buzz is that the deal will be completed by September. Once done, LIC will get about 2,000 branches by which it can sell its products while the bank would get massive funds from the insurer. The bank will also get the accounts of about 22 crore policy holders and subsequent flow of fund.

IDBI Bank, which is grappling with mounting toxic loans with gross non-performing assets rising to a staggering ₹55,600 crore as of the March quarter, will get the much-needed capital support to revive its fortune.

Published on July 12, 2018

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