Banks, FIs will have to factor cross-holding norms for investing in LIC IPO

State-owned insurer is a significant investor in banks' capital, especially in public sector lenders.

Banks and financial institutions investing in the initial public offer (IPO) of the Life Insurance Corporation of India (LIC) have to consider deduction from their capital as the state-owned company has put money in such organizations, said experts.

Under Basel III norms for banks investments--like if done in LIC’s IPO--are considered reciprocal cross-holdings artificially propping up capital adequacy. Hence, a cross-holding has to be fully knocked out from the capital base, said senior bank executives.

LIC is a significant investor in banks' capital--equity, additional tier I bonds and Tier II bonds—and especially in public sector lenders. When the same banks and institutions decide to invest money in LIC’s public offer, there could be an element of cross holding. LIC has 8.4 per cent equity stake in State Bank of India, 7.92 per cent in ICICI Bank, and 8.15 per cent in Axis Bank as part of a promoter group.

Executives said banks and financial institutions will assess how capital position will be impacted due to deduction. Banks and companies  are part of the institutional investor's segment and managers to public offering have approached to solicit investments in a run-up, bankers said.

LIC’s Rs 21,000 crore IPO will hit the market on May 04.

Banks must apply a “corresponding deduction approach” to such investments in the capital of other banks, other financial institutions and insurance entities. This means the deduction should be applied to the same component of capital (Common Equity, AT 1 and Tier 2 capital) for which the capital would qualify if it was issued by the bank itself, according to the Reserve Bank of India.