Reports of state-owned LIC planning to buy the government’s holding in the troubled IDBI Bank to become a majority shareholder have triggered a debate around whether LIC should be using policyholders’ money to buy a controlling stake in a troubled bank. LIC’s bid to acquire controlling stake in the bank may give it an entry into the banking space, while allowing the government to raise around Rs 10,000 crore — thereby helping it meet the disinvestment target for the year.
What is the proposal to increase LIC’s stake in IDBI Bank?
Having been unable to find a suitable private sector buyer for IDBI Bank, the government has initiated discussions with Life Insurance Corporation (LIC) of India to pick up a controlling stake in the bank. According to sources in the government, the proposal involves LIC raising its stake in IDBI Bank to 51% from the around 11% that it had at the end of March. The deal is expected to cost LIC around Rs 10,000 crore, and the Corporation is likely to take the proposal to its Board for approval after getting clearance from the Finance Ministry. LIC has presented to the government a number of synergies and mutual benefits. While IDBI will get the requisite capital, LIC will get a controlling stake in a bank, and is learnt to be preparing to bring in a professional management to run it.
But can LIC enter a new business to begin with?
In 2013, LIC Housing Finance had applied to the Reserve Bank of India for a universal banking licence. The RBI, however, chose IDFC Bank and Bandhan Bank for licences out of a list of 26 applicants. LIC owns 40.31% stake in its housing finance arm. In its discussions with the Finance Ministry, the Corporation has argued that the Life Insurance Corporation Act, 1956 permits it to enter an unrelated business that it is capable of running — and it can, therefore, pick up a controlling stake in a bank. Section 6(2)(h) of the Act (on the “Functions of the Corporation”) says that “without prejudice to the generality” of the provisions that make it the “general duty of the Corporation to carry on life insurance business”, it can “carry on any other business which may seen to the Corporation to be capable of being conveniently carried on in connection with its business and calculated directly or indirectly to render profitable the business of the corporation”.
Will it require changes in regulations as well?
The existing rules of the Insurance Regulatory and Development Authority of India (IRDAI), the autonomous, statutory regulator of the Indian insurance and re-insurance industry, do not permit LIC to raise its shareholding in a single listed entity beyond 15%. Since LIC already holds 10.82% stake in IDBI Bank (as on March 31), it would require exemption from the IRDAI to pick up a majority stake in the bank. The insurance regulator has laid down this condition to ensure that the Corporation does not put policyholders’ money at risk, and has a diversified portfolio.
But why does the government want to cut its stake in IDBI Bank?
IDBI Bank is the worst performing state-owned lender in terms of Non-Performing Assets (NPAs). The government has been trying to privatise IDBI Bank over the past couple of years, but mounting losses and rising bad loans have made it difficult to attract buyers. For the year ended March 31, 2018, IDBI Bank’s Gross NPAs rose to 27.95% — which means that out of every Rs 100 loaned by the bank, Rs 28 turned into NPAs — from 21.25% as on March 31, 2017. In 2017-18, the bank reported a net loss of Rs 8,238 crore, up from Rs 5,158 crore in 2016-17. If the government sells nearly 40% of its stake in the bank, it will get Rs 10,000 crore that will not only help meet its disinvestment target, but will also reduce, to a similar extent, the need for future capital infusion.
Unlike in the other public sector banks, the government can pare its stake in IDBI Bank to below 50%, because this bank is not governed by the Bank Nationalisation Act, 1969. The central government owned 80.96% equity in IDBI Bank on March 31, 2018, but following a capital infusion of Rs 7,881 crore in May, its stake went up to 85.96%. LIC’s stake would have been diluted in proportion to the fresh equity issuance by the bank.
Besides issues of legal or regulatory compliance, is there any other problem with LIC buying a controlling stake in IDBI Bank?
Because LIC deals with policyholders’ money and provides them with protection, some experts argue that buying a controlling stake in a beleaguered state-owned bank may not be a prudent decision. It could put the Corporation at risk, since it would be required to pump in capital in the bank year after year. LIC is already a large investor in public sector banks and holds a more-than-9% stake in 16 out of India’s 21 public sector banks. Loading up a higher stake in IDBI Bank will expose the Corporation to the concentration risk of investing disproportionately in a single sector.
Is this proposed disinvestment similar to oil and gas explorer ONGC buying oil marketing company HPCL?
When ONGC bought HPCL, it paid money to the government for picking up its stake in the latter. While LIC’s proposed buying in IDBI Bank is somewhat similar, there is one key difference. While ONGC used its own cash reserves and borrowed to complete the deal, the funds at the disposal of LIC are valuation surpluses, reserves, and policyholders’ money. Using those funds to buy a badly performing bank entails a much greater risk than ONGC took while buying HPCL.
