LIC set to finalise turnaround strategy for debt-ridden IDBI Bank

Insurer's board meets on Monday to approve the proposal to increase stake up to 51%

Life Insurance Corporation (LIC) is set to finalise its turnaround strategy for the beleaguered state-run IDBI Bank. The board of directors of LIC, which is meeting on Monday, is likely to give its nod to the proposal to increase the insurer’s stake to 51 per cent in the bank. Currently, the government owns 80.96 per cent of IDBI Bank, while LIC holds 10.82 per cent.

According to a senior official, the board will discuss a blueprint for reviving the bank and, accordingly, take a decision. Sources say LIC has done several rounds of due diligence with IDBI Bank. 

The bank’s new managing director and chief executive officer, B Sriram, has been in touch with the LIC top management, discussing the turnaround plan, debt position, balance sheet, and existing obligations.

After the board meeting, both LIC and IDBI Bank will seek necessary clearances from regulatory authorities, including the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi), the official quoted above said.

LIC plans to infuse Rs 100-130 billion into IDBI Bank through a preferential allotment of fresh equity shares. However, this will only be a strategic investment and the insurer will not control the bank management. The LIC board will take a final call on fund infusion in Monday’s meeting in Mumbai. LIC will also recommend names of two nominee directors to represent the insurer on the bank’s board after this deal. Sources say the LIC board will also discuss the issue regarding an open offer to the minority shareholders of IDBI Bank.

According to Sebi's Takeover Code, an acquisition of more than 25 per cent in a listed entity is termed as control and requires an open offer. Minority shareholders account for 8.22 per cent in this case. The government, however, is unlikely to participate in the offer.Last month, the Insurance Regulatory and Development Authority of India approved LIC’s plan to buy a 51 per cent stake in IDBI Bank. According to another official, the deal will create an ecosystem for bancassurance for the insurer. The synergies between LIC’s distribution network and the bank’s branches will help the latter access new deposits and eventually reduce operating costs. Bancassurance is the selling of insurance products and services by banking institutions. Internationally, insurance companies have promoted banks or created a financial conglomerate either through a group company or a holding firm, the official said. Some of the examples are Prudential Financial (which owned Prudential Bank and Trust FSB), ING Group, and MetLife.

The government has been attempting to bring a strategic investor in the ailing public sector lender for over three years but has not met with success. International Finance Corporation had done due diligence of the bank’s books, but the matter did not move ahead. Currently, IDBI Bank is under the RBI’s Prompt Corrective Action framework due to a very high level of bad loans. The government is of the view that the current valuation of IDBI Bank was not reflective of its inherent value and selling the bank to a private investor at this juncture may not have accrued the best value. IDBI Bank has a market cap of Rs 240 billion and owns real estate and non-core assets worth around Rs 70 billion each.

Board’s Agenda

• Proposal of fund infusion of Rs 100-130 billion via fresh equity
• Appointment of two nominee directors on the bank's board after the deal
• To discuss open offer plan for minority shareholders of the bank
• To seek regulatory clearances from RBI, Sebi