On May 5, the Cabinet Committee on Economic Affairs (CCEA) chaired by PM Narendra Modi gave an in-principle approval for strategic disinvestment along with transfer of management control in IDBI Bank.
With this, the process of stake sale in IDBI Bank will be kicked out formally. Sources told Moneycontrol that Life Insurance Corporation of India (LIC) would be paring its stake in multiple tranches, starting with an initial sale of 3-5 percent ahead of its initial public offering (IPO) in Q3FY22.
"The idea is to unlock value. And it will be through multiple tranches that are spread out evenly. The new buyer should not only be able to infuse capital into the bank, but also get additional technology prowess for IDBI Bank to compete with its peers," said an official.
CCEA had said in a statement that the extent of respective shareholding to be divested by Government of India and LIC shall be decided at the time of structuring of transaction in consultation with RBI.
LIC did not respond to a query sent by Moneycontrol.
LIC holds 49.24 percent stake in IDBI Bank. Considering that LIC holds 5,29,41,02,939 shares in IDBI Bank at price of Rs 37.95 per share (as of May 5 close on BSE), the value of its 5 percent stake is currently Rs 1,004.55 crore.
Moneycontrol had reported earlier that LIC saw Rs 3.76 lakh crore addition in its equity holding value in FY21.
Data compiled by Moneycontrol showed that LIC's equity holding value rose to Rs 7.69 lakh crore in FY21 as against Rs 3.93 lakh crore a year ago. This represents a whopping 96 percent year-on-year (Y-o-Y) growth.
Currently, Government of India and LIC together own more than 94 percent of equity of IDBI Bank. LIC holds 49.24 percent stake and is the promoter with management control. The government is the co-promoter.
LIC sources said that the reduction in shareholding will be through a mix of divestment and strategic sale. Applications will be invited from interested parties after a meeting with the government on the timing.
The Insurance Regulatory and Development Authority of India (IRDAI) had in June 2018 made an exception when it allowed LIC to hold a 51 percent stake in IDBI Bank. LIC acquired the stake from the government.
Insurance regulations state that an insurer can hold only a 15 percent equity stake in an entity to ensure there is no concentration of risk. LIC was given a special exemption and has 12 years to bring down its stake.
How does this benefit LIC?
LIC's mega IPO is scheduled for the third quarter of the financial year. Prior to that, any stake sale will help in sprucing up its embedded value and subsequently the valuation.
The first step prior to the IPO is determining LIC’s embedded value. The insurer had a balance sheet of Rs 36 lakh crore as of Q3FY21.
The embedded value (EV) of a life insurance company comprises two key elements. First, it includes the net asset value or the net worth of the company, which represents the market value of the company’s assets attributable to the shareholders.
Secondly, the EV also comprises the present value of the company’s future expected profits from its existing business portfolio, as on the date of valuation.
The valuation will be a multiple of the EV and it will be determined by the actuarial agency.
"The idea is to sell IDBI Bank stake at a price that helps us good returns. Hence, there is to rush and we will sell only at the right price," added another official.
LIC had infused Rs 21,600 crore while buying a 51 percent stake in IDBI Bank. In 2019, it paid Rs 4,793 crore as part of another fund infusion into the bank.
During that time IDBI Bank was loss-making, had high non-performing assets and was also under prompt corrective action that curtailed its ability to lend.
As part of the steps to turnaround IDBI Bank, there is also an effort to cut down stake in non-core assets. As part of this, the bank sold 23 percent stake in IDBI Federal Life Insurance to Ageas for Rs 460 crore. This bought down IDBI Bank's stake in the life insurer to 25 percent.
Positive turnaround of IDBI Bank
LIC-owned IDBI Bank on May 3 reported a nearly four-fold jump in its standalone profit after tax to Rs 512 crore in the March quarter compared to Rs 135 crore in the year-ago period on the back of an impressive 38 percent growth in its net interest income (NII).
The lender also turned profitable on an annual basis after five years as it reported a standalone profit of Rs 1,359 crore for 2020-21 fiscal that ended in March as against a loss of Rs 12,887 crore in FY20.
In March this year, the Reserve Bank of India (RBI) removed the LIC-controlled bank from its prompt corrective action (PCA) framework, which was imposed in May 2017, after it had breached certain regulatory thresholds, including capital adequacy, asset quality and profitability.