Life Insurance Corporation of India's (LIC) acquisition of IDBI Bank has led to unintended consequences. The market regulator Securities and Exchange Board of India (Sebi) has partially frozen LIC’s voting rights in the National Stock Exchange (NSE). The reason being the 5-per cent shareholding cap on trading members. While LIC is not a trading member, following its acquisition of IDBI Bank — a trading member of NSE — it is deemed as one.
Sebi rules exempt a trading member to hold more than 5 per cent of the paid up capital of a stock exchange 'directly or indirectly'. A trading member is the entity that facilitates trading on a stock exchange.
Earlier this year, LIC completed the acquisition of a 51 per cent stake in the beleaguered lender IDBI Bank from the government. Following the acquisition, NSE has reclassified LIC from 'public shareholder' to an 'associate trading member'.
LIC currently holds a 12.51 per cent stake in NSE, while IDBI Bank and its subsidiary IDBI Trusteeship Services hold another 1.45 per cent stake, taking the total shareholding to 13.96 per cent.
“Voting rights of Life Insurance Corporation of India (LIC) to the extent of 4.89 per cent is freezed pursuant to Sebi letter dated May 13, 2019,” says a disclosure made by NSE.
The freeze is to the extent of breach of composite trading member shareholding cap. The shareholding of trading members in the NSE is 53.84 per cent. A Sebi circular says the shareholding of trading members or their associates and agents cannot exceed 49 per cent.
The Sebi circular also says depositories have the power to freeze their voting rights and all corporate benefits till the time the shareholding of a trading member gets divested.
Industry players say either LIC will have to divest its holdings in NSE or IDBI Bank might have to surrender its trading member license to ensure compliance of Sebi regulations.