The insurance regulator, on Friday, 29 June, allowed the nation’s largest life insurer, Life Insurance Corporation of India, to increase its stake in state-owned IDBI Bank Ltd. up to 51 percent—at a time when a third of its loans are stressed.
The decision was taken by the Insurance Regulatory Authority of India at its board meeting earlier on Friday, an IRDAI official told BloombergQuint. LIC will invest between Rs 10,000 crore and Rs13,000 crore in the troubled state-owned lender in several tranches as part of the capital infusion plan.
LIC will not get management rights on the board of IDBI Bank and must pare its stake in the bank to 15 percent over a period of five to seven years, the official added. The insurance regulator has asked the life insurer to present a schedule for paring its stake.
BloombergQuint earlier reported that LIC is expected to infuse equity but won’t get management control of the lender.
Expecting LIC to reduce stake to 15 percent in five to seven years “is neither here or there”, SB Mathur, a former chairman at the insurer, said. Who knows what will happen in five years, he asked, adding that it will be difficult to say whether this investment will deliver decent returns in five years. Don’t know if this “half-hearted” measure will work, Mathur said.
IDBI Bank’s bad loans, at 27.95 percent of its total advances, are the worst among Indian lenders.
It’s total stressed assets stand at 35.9 percent, according to India Ratings that downgraded the lender earlier this month citing its deteriorating operating metrics.
The government currently owns 86 percent in the lender, according to shareholding data on a 21 May stock exchange filing of the bank. LIC already owns 8 percent in the bank. A purchase of anything more than an additional 7 percent by LIC in IDBI Bank required IRDAI’s permission, under the current regulations.
LIC board will have to take a call on how this investment will work, RK Nair, former IRDAI member, said. A lot of IDBI Bank’s activities could bring value to the insurer, and investment banking and primary dealerships could be strategic fit for LIC, he said. Nair isn’t sure what the fate of IDBI’s insurance business will be.
LIC’s Past With Public Sector Banks
In the past, when LIC has come to the rescue of public sector banks, it has been through a purchase of preferential shares issued by public sector banks. A number of banks issued preferential shares to LIC in 2015 and 2016, when the government’s allocated capital was considered to be insufficient and the banks were not in a position to raise equity capital from the markets. According to a Kotak Institutional Equities report dated April 2016, LIC had invested Rs 1,850 crore in public sector banks in 2014-15 and Rs 2,539 crore in 2015-16. As a result of this, LIC’s shareholding in a number of public sector banks has increased over the past few years.
The Rs 13,000-crore capital infusion by LIC in IDBI Bank comes after the Centre already pumped in Rs 18,491 crore as part of the bank recapitalisation package. This includes Rs 10,610 crore infused in the financial year 2017-18 and Rs 7,881 crore in May, according to stock exchange filings.
Mathur said LIC will have to pump in more capital in IDBI Bank, if required. “It will be significant to know what the stipulations for further capital infusion are,” he said.
LIC will further need an approval from the market and banking regulator. It will seek an exemption from making an open offer under SEBI's takeover provisions. The articles of association of IDBI will also have to be amended through a resolution passed by shareholders of the bank.
(This story was first published on BloombergQuint and has been republished in an arrangement.)
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