IDBI Bank buyer to get leeway; promoter holding, listing norms may be eased

The government will ask the Reserve Bank of India (RBI) to consider giving the potential buyer of IDBI Bank some leeway on complying with the regulatory norms for private banks, including a time-bound reduction in promoter holdings.

An official source said the government may also urge the Securities and Exchange Board of India (Sebi) to give some flexibility to the strategic investor in IDBI Bank on the minimum public float norm for listed companies.

In the pre-expression of interest (EoI) roadshows currently under way for the disinvestment, the department of investment and public asset management (DIPAM) is seeking feedback from investors on the level of initial shareholding they would be comfortable with in the bank.

Currently, Life Insurance Corporation (49.24%) and the government (45.48%) together hold 94.78% stake in the lender.

Though both have been keen to sell the maximum stakes they could, it is being felt that if a buyer takes over the entire stake held by the two or a stake closer to that, it will be a challenging task for it to meet the regulatory requirements. So, the potential buyer may be given the option to buy a stake of around 60% in IDBI Bank instead of the entire stake held by LIC and the Centre, so that it would be easier for the acquirer to bring down the stake to the stipulated level of 40% over five years.

According to the RBI norms last revised in November 2021, the promoter of a private sector bank has to maintain a minimum of 40% of the paid-up voting equity share capital of the bank for the first five years after start of operations. The RBI also has the discretion to ask the promoter to pare the holding to the lock-in level over these five years or even earlier.

In an earlier instance in 2015, the RBI had asked Bandhan Bank promoter BFHL to pare its stake in the bank to 40% in three years. In 2018, the RBI had frozen the remuneration of Bandhan Bank CEO and barred the new bank to open branches without its approval as the promoter failed to bring down stake as stipulated and finally, in August 2020, the BFHL met the promoter holding norm by selling 20.95% stake in the bank to seven investors, including Singapore’s state-run investors GIC and Temasek.

Similarly, a strategic investor in IDBI Bank may not like to disinvest stake in the initial 2-3 years, a period when it will likely be setting up a new management team, restructure business and attempting a rebranding of the banking company.

As being practically a government-run bank, IDBI Bank has been enjoying a leeway on compliance with this Sebi norm too, but once it becomes a private bank, it might lose such privilege.

There could even be a conflict between the two regulatory dispensations. As IDBI Bank will come under a private promoter after the strategic sale, these privileges would end and so, these issues would need to be resolved with the regulators before the bidding process starts, the government reckons.
To illustrate, if the government and LIC sell a total of, say, 55% equity in the lender to the private investor, it will have to make an open offer to acquire the stake from minority shareholders, which may take its holding to around 60%. This means, to comply with the Sebi norm of minimum 25% public float, the promoter will have to bring down its stake to around 35% in three years, a clear dampener for the potential bidders.

The combined stake of 94.78% that the Centre and LIC hold in IDBI Bank is worth about `48,611 crore at current market prices.
The DIPAM is also ascertaining whether the two regulators can arrive at a common timeline of over five years for the strategic investor in IDBI Bank to dilute its stake to comply with the listing norms as well as the RBI rules on promoter holdings in private sector banks.

At the time of approving the IDBI Bank deal, the new promoter might have to commit to a stake-dilution schedule and abide by that to avoid penal consequences, the sources added.

After LIC acquired 51% in IDBI Bank in January 2019, the insurance regulator allowed it to dilute its stake from the regulatory requirement of 15% in due course under a special dispensation. The RBI has given LIC leeway on meeting the requirement of reducing its stake to 40%.
After a gap of five years, IDBI Bank was back in the black with a net profit of 1,359 crore for FY21. It reported a 53% jump in standalone net profit at578 crore for the third quarter ended December 2021.

Success in IDBI Bank sale, though not a public sector bank (PSB), may be indicative of a broader investor appetite for public sector banks with adequate loan-loss reserves.

PSBs are part of the “strategic sectors” wherein the government, under a new policy, will reduce the number of state-run lenders to a bare minimum from a dozen now.

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