LIC likely to face regulatory hurdle in IDBI Bank buyout

Life Insurance Corporation of India’s reported proposal to acquire a 40 per cent stake in the loss-making IDBI Bank may face regulatory headwinds as the former has an equity stake in many large companies the latter has given loans to, raising the possibility of breaching regulators’ caps on equity holding in case the loans get converted into equity.

Market experts say that in the aforementioned scenario, the market and insurance regulators may take a dim view of the common shareholding of the public sector life insurer and the public sector bank as they will be seen as acting in concert.

Moreover, they feel that in case loans given by the insurance behemoth and the bank to the same entities in India Inc turn sour, it could have implications for the former as policy-holders’ funds will be at stake.

Further, if the life insurer acquires a 40 per cent stake in IDBI Bank, it may have to shed its stakes in other banks. As of March-end 2018, LIC had stakes in a host of banks, including State Bank of India (9.98 per cent), ICICI Bank (12.38 per cent), Axis Bank (14 per cent), Punjab National Bank (12.24 per cent), Corporation Bank (13.03 per cent) and Bank of India (8.77 per cent).

Experts underscore that the banking regulator may not be comfortable with an insurer holding a large stake in a bank and at the same time having stakes in a slew of banks.

As at March-end 2018, the government and LIC held 80.96 per cent and 10.82 per cent, respectively, in IDBI Bank.

IDBI Bank is grappling with bad loans, which have reached 27.95 per cent of its gross advances. It needs a huge amount of capital to clean up its balance sheet and meet minimum regulatory capital requirements.

In FY2018, the bank received a capital infusion amounting to ₹12,865 crore (₹4,590 crore from the government; ₹7,881 crore again from the government via recapitalisation bonds; and ₹394 crore from LIC).

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