The Reserve Bank of India (RBI) has given a nod in principle to Life Insurance Corporation (LIC) for acquiring a majority stake in the IDBI bank, the sources said.
The government-owned insurance giant had sought the approval of the banking regulator before approaching the Insurance Regulatory and Development Authority (IRDAI) to seek regulatory approvals, a senior government official said.
After the union’s cabinet approves the proposal, the RBI will examine whether the LIC meets the “appropriate criteria” to be a promoter with a controlling stake in the IDBI bank.
Cabinet approval is required because government participation will be diluted below 51 percent in IDBI Bank. The government owned 85.96 percent and LIC 7.98 percent in Banco IDBI at the end of June.
The sources said that LIC could have to reduce its participation in other banks below 10 percent, in an attempt to comply with regulatory norms, before seeking more RBI assent. “LIC will not seek any exemption from the RBI, it will lower its participation below 10 percent in other banks,” said one source.
LIC has more than 10 percent in Axis Bank (13.1 percent), Corporation Bank (13 percent), Punjab National Bank (12.2 percent), State Bank of India (10.1 percent) and Syndicate Bank (10.2 percent) to June 30 of this year, according to data compiled by the Business Standard Research Bureau.
LIC also has the status of promoter in the case of Axis Bank.
“LIC lowering its participation below 10 percent will not have a significant impact on our bank, other investors will buy those shares,” said a senior executive at one of these banks.
While giving his assent, IRDAI had granted LIC an exemption to have more than 15 percent in one entity. The IRDAI rules prevent any insurer from owning more than 15 percent in a listed financial company.
However, the insurance regulator has asked LIC to reduce its participation in the IDBI bank for a period of five to seven years, according to sources.
The IDBI Bank is likely to become a subsidiary of LIC in the lines of LIC Housing Finance, LIC Mutual Fund and LIC Pension Fund.
The IDBI Bank will seek the approval of its shareholders and Sebi. The bank must issue a postal voting notice and hold a separate general meeting of its interested parties on this matter.
LIC is expected to inject 100-130 billion rupees into the IDBI bank through a preferential allocation of new capital shares at a price determined by a formula according to the Sebi regulations.
The agreement will likely unleash an open offer, which LIC will make to IDBI Bank shareholders.
According to the Sebi guidelines, an acquisition of more than 25 percent in a listed entity is called control and requires an open offer. The acquiring company must make an offer to existing shareholders to buy an additional stake in the company.