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MUMBAI: One of the sweeteners to comfort the policy holders in the LIC-IDBI Bank deal is that the insurer would bring down its stake in future, though no time frame is specified.
If history is any indication, it may take more than 15 years for LIC to pare its stake in IDBI Bank to meet regulatory requirements.
LIC owned 27 per cent of Corporation Bank in 2002 with an intention to take over the lender.
But the regulators then rejected the plan.
And it had taken 16 years for LIC bring its stake down to 13.5 per cent, regulatory filings show.
The reduction happened with Corporation Bank selling more shares rather than LIC selling them down.
“LIC had success with Corporation Bank, which they bought when the bank was in good shape,” said Arun Kejriwal, founder of Kejriwal Research Investment Services.
“The state of Corporation Bank was different from what IDBI Bank is going through now.
However, LIC will become a dominant partner by investing in IDBI Bank.”
Insurance regulator’s approval to LIC’s government-guided proposal to purchase 51 per cent stake in IDBI Bank has drawn criticism from experts as it raises many risks for the insurer.
The regulator had to waive off prudential investment norms to facilitate the transaction that has triggered debate whether the bending of rules for one transaction would expose them to similar demands.
LIC had bought 27.02 per cent in Corporation Bank in 2002 for Rs 99.67 apiece, according to ET Database.
It reduced its stake to 13.03 per cent at the end of March 31, 2018, valuing its stake at around Rs 540 crore.
Although details of whether the investment led to profits beating the market is not clear, but it once sold 1 per cent which might have resulted in a profit of Rs 15 crore, data show.
LIC’s stake value had touched Rs 1,200 crore in March 2015.
“Insurance companies take 10-20-30 years view on investment and that is how they make money,” said UR Bhat, director at Dalton Capital Advisors.
“LIC will make good return by investing in public sector banks with two-third market share and at current levels.”
The latest deal is pending approval from the Reserve Bank of India and the capital market regulator.
On June 29, 2018, the Insurance Regulatory and Development Authority of India gave approval to LIC’s proposal to take over 51 per cent stake in IDBI.
The approval is given with an understanding that LIC will reduce its stake in the bank going forward and bring it down to the regulatory requirement of 15 per cent.
The stake buy will be in tranches through new share sales at a price determined by a regulatory formula.
Although some are reluctant about the plan, some investors are confident that returns could be immense.
“LIC will require capital and professional management to turnaround the bank and this will pay a phenomenal return on investing in IDBI Bank,” said Deven Choksey, MD, KRChoksey.
“LIC is looking at it as a strategic investment rather than financial investment.”
While LIC will pay around Rs 10,000 crore-Rs 12,000 crore to buy an additional 43 per cent stake in the bank which has the highest bad loans among big banks.
