IRDA allows LIC to increase stake in IDBI Bank to 51%

Mumbai/Chennai: The Insurance Regulatory and Development Authority of India (IRDA) on Friday approved Life Insurance Corporation of India’s (LIC’s) proposal to acquire a majority stake in IDBI Bank Ltd, which will take its stake to 51%, said three officials with direct knowledge of the matter who did not want to be named.

LIC currently holds 8% in the state-run bank. Mint reported first on 11 June that the government may sell a majority stake in IDBI Bank to LIC to reduce its stake.

“The insurance regulator has approved LIC’s proposal to acquire a majority stake in IDBI Bank. Insurance rules do not allow an insurance company to invest more than 15% in a company, so the regulator provided LIC an exemption from the norms. LIC will pare stake to 15% in the coming 5-7 years,” said one of the officials cited above.

LIC is likely to pay around ₹ 10,500 crore for a 43% stake, Mint had reported on 23 June. IRDA was willing to waive off the regulation if the proposal came to them, Mint reported on 28 June.

“The decision to waive the regulatory threshold is based on market conditions and the larger interest of the market and shareholders. This will be an investment where LIC will get three board seats. IDBI Bank will remain a professionally-run board and company,” said the second of the three officials mentioned earlier.

“IRDA has given similar exemption to LIC in the past as well, so this is not new. IRDA will also allow the private sector to invest beyond the stipulated limit provided they can provide reasoning,” said the third official cited above.

While IRDA approved the proposal in a board meeting held on Friday, it’s important to know that only about ₹ 100 crore of LIC’s money is from shareholders, with the rest belonging to policyholders.

“LIC has invested in other banks, so what a 43% stake in IDBI Bank will get them is not clear. Plus the bank is in a bad shape and it may be a while for things to turn around,” said the CEO of a private insurance company who did not wish to be named.

“This is an extraordinary event and should not be allowed as a precedent. Insurers holding a larger share of any one company for policyholders’ funds can increase the entire risk profile of the portfolio. However, this is ultimately an equity transaction for policyholder funds and can result in profits or losses. The determinant factor will be whether this is a significant part of the entire equity portfolio, but that needs to be monitored and the reduction in stake over the next 7-10 years has to be done carefully to avoid losses,” said Joydeep K. Roy, partner and leader, insurance sector, PwC.

IRDA had not officially confirmed the developments until Mint went to press. A PTI report quoted IRDA chairman Subhash Chandra Khuntia as saying the board’s decision will be printed on the regulator’s website.

These developments come even as debt-ridden IDBI Bank told stock exchanges on Friday that there has been no discussion with LIC regarding investment in the bank.

The government has been trying to privatize IDBI Bank for the past couple of years due to mounting losses and non-performing assets (NPAs). IDBI Bank has the highest NPA ratio among state-run lenders; its gross NPAs almost doubled to ₹ 55,588.26 crore during fiscal 2018.

The bank’s loss widened to ₹ 8,237.92 crore in the financial year ended 31 March 2018 from ₹ 5,158 crore in the previous year.