Banks will carefully weigh the “capital deduction” impact of cross-holdings before investing in the upcoming initial public offer (IPO) of the Life Insurance Corporation of India (LIC).

The reason: the Corporation already has investments in many of the Banks.

A clause in the Reserve Bank of India’s Master Circular on Basel-III Capital Regulations relating to “Reciprocal Cross-Holdings in the Capital of Banking, Financial, and Insurance Entities” may prevent banks from going all out and investing in LIC’s IPO.

According to the circular, Banks are required to apply a “corresponding deduction approach” to reciprocal cross-holdings in the capital of other banks, other financial institutions, and insurance entities.

Capital deduction impact

Since reciprocal cross-holdings of capital might result in artificially inflating the capital position of banks, such holdings of capital will be fully deducted, it added.

As LIC has investments in the form of equity, additional Tier (AT) 1 and Tier 2 capital in various banks, investments made by the latter in the corporation’s upcoming IPO could impact their capital adequacy by a few basis points.

So, Banks will need to assess whether the returns they may get from investing in LIC’s IPO more than offsets the capital deduction impact of the investment.

LIC has investments in the form of equity, additional Tier-1 and Tier-2 capital in various Banks.

Among the banks where LIC (and its various schemes) holds equity investments are State Bank of India (8.40 per cent), Punjab National Bank (8.34 per cent), Canara Bank (8.83 per cent), Bank of India (7.05 per cent), Union Bank of India (5.63 per cent), Bank of Baroda (4.71 per cent), ICICI Bank (7.92 per cent), IndusInd Bank (5.36 per cent), Kotak Mahindra Bank (5.29 per cent) and YES Bank (4.98 per cent).

Besides the aforementioned investments, LIC is the promoter of IDBI Bank with 49.24 per cent stake.

Banking expert V Viswanathan observed that since LIC has invested in equity, AT-1 or Tier-II capital of most of the banks, the cross-holding regulation may apply. This will require full deduction from the regulatory capital of the investing entity (Bank) to the extent of the investment to be made by it in LIC.

The government will sell 3.5 per cent stake, or 22.13 crore equity shares, in LIC through an offer-for-sale via the IPO. The issue will open on May 4 and close on May 9. The price band for the IPO has been set at ₹902-949.

A discount of ₹45 per equity share will be offered to retail and eligible employee category and ₹60 to policyholder category.

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