LIC-IDBI Bank deal likely to breach mutual fund crossholding norms

Insurance major will hold over 10% in three AMCs; LIC may be required to merge IDBI Mutual Fund with its own fund house, according to experts

Life Insurance Corporation of India’s (LIC’s) approval to acquire a majority stake in IDBI Bank on Monday could leave the insurance major holding over 10 per cent stake in three asset management companies (AMCs), a situation the market regulator might not be too happy with. 

IDBI Asset Management and IDBI MF Trustee Company are subsidiaries of IDBI Bank, and the lender holds 66.7 per cent and 100 per cent in these two entities, respectively. A majority holding means LIC will hold more than 10 per cent in IDBI MF.

LIC is also a sponsor of UTI Mutual Fund by virtue of its 18.2 per cent holding. It also runs its own AMC, with LIC and LIC Housing Finance together owning over 84 per cent in LIC Mutual Fund and over 94 per cent in LIC Mutual Fund Trustee. 

Last year, the Securities and Exchange Board of India (Sebi) had asked fund houses to reduce crossholdings in mutual funds and restrict holding in competing fund houses to below 10 per cent. 

Another crossholding could attract the attention of the regulator and leave LIC with no option but to merge IDBI MF with its asset management firm, said experts. 

LIC is yet to reduce its crossholding in UTI MF to comply with the diktat and, with the AMC’s listing hanging fire, a possible stake sale in the near future looks unlikely. If anything, LIC is reportedly keen on buying out stakes of the other three domestic shareholders in UTI MF. 

An email sent to LIC and IDBI Bank did not elicit a response till the time of going to press. It is also unclear if the former will write to the regulator to relax existing crossholding norms for mutual funds or whether Sebi will agree to this request. Sebi did not respond to an email seeking comment. 

IDBI Bank has been scouting for buyers for its asset management arm for quite some time now. It may now have to abort this process in favour of a merger. The bank has even appointed a transaction advisor to offload 25 per cent stake held by IDBI Capital Market in the AMC. 

“IDBI MF had been on the block for a while but has found no takers. Selling the entity would not fetch much and the logical thing to do would be to merge IDBI MF with LIC MF,” a senior MF official said on the condition of anonymity. 

With assets of Rs 105 billion for the quarter ended June, IDBI MF ranks 25th among 42 fund houses in the country. The AMC is operating on a skeletal structure right now, and is mostly focussed on the institutional business, according to the person quoted above. LIC is ranked 17th with assets worth Rs 204 billion and, like IDBI MF, has meagre equity assets. IDBI Bank is hoping to conclude the sale of its 30 per cent stake in NSDL, valued at about Rs 9 billion. The process of stake sale in IDBI Federal Life Insurance is expected to conclude by September.

The diktat to focus on core operations and the surging strain on balance sheets has forced several public sector banks to look at reducing or selling their stakes in mutual fund subsidiaries. In 2014, the finance ministry had asked public sector banks to review their exposure to non-core operations such as mutual funds and insurance to conserve capital when the stricter Basel-III norms kicked in.

Crossholding Tangle

• LIC to take majority stake in IDBI Bank
• Move could lead to insurance major holding over 10% in three asset management companies (AMCs)
• Besides LIC MF, the insurer is a sponsor at UTI MF and now IDBI MF
• Sebi regulations do not allow a single sponsor to hold over 10% crossholding in more than one AMC
• Experts say LIC may have to merger IDBI MF and LIC MF