Let LIC takeover of IDBI bank be transparent and reasonable

By Vijay Gokhale

It is reported that the total investment will be in the range of Rs. 10 to 13 thousand crores and in return LIC will get three berths in the Board of the bank. The affairs of the bank will be professionally run by the board. It is however not clear whether it is a financial investment or a strategic one. There is a talk that LIC is trying to fulfill it’s dream of having a bank in the group through this route with the help of the Government. The Finance Minister in his budget speech for 2016-17 had stated that the process of transformation of IDBI bank had already started and Government would take it forward and also consider the options of reducing it’s stake to below 50%. So this is a win win situation for both. It appears that the Government may be favoring this way given that it is finding it difficult to infuse more and more capital in the financially stressed public sector banks. It may be remembered in this context that the Government has infused Rs. 2729 crores in the equity capital of IDBI bank in December 2017 and another Rs. 7881 cores in March 2018 by way of Recapitalisation bonds.

The opinions expressed on this issue by various stakeholders have been poles apart. Some say that the government has arm twisted LIC and has compromised the interests of policy holders. Why LIC should at all invest in this bank which is neck deep in NPAs and is already under “Prompt Corrective action” of RBI? Others say that it is a long term investment, performance of the bank will improve once recovery of bad loans begins to show improvement, share price of the bank will then go up and the investment will start generating good returns. The network of bank branches will help LIC in expanding it’s business through Bancassurance. The fact that the infusion of additional capital either by LIC or by Government is in any case to protect the interests of the depositors of the bank cannot be lost sight of.

It may be pertinent to note in this context that the Finance Minister during the discussion on Repeal Bill 2003 had given the assurance to the Parliament on 8th December 2004 that that the government holding in IDBI Ltd. would always be above 51%. In view of this, RBI has stated in a circular issued in April 2005 that IDBI Ltd. may be considered a government owned bank and is categorized under a new sub group “other public sector banks.” A circular issued in December 2007 by the Department of Financial services of the Ministry of Finance and addressed to the Secretaries of all Ministries and departments of GOI had cited the provision in Articles of association of bank that the central government being a shareholder of the company shall at all times maintain not less than 51% of the issued capital of the company and had stated that IDBI Ltd. may be treated on par with Nationalized banks/State Bank of India for all purposes including deposits/bonds/investments/guarantees etc. and Government business. This fact of Government holding always remaining above 51% was also reiterated in the offer document of Flexi Bonds of the bank issued in 2005-06 and in the explanatory statements attached to the Special Resolutions passed in Annual General Meetings of the bank held in July 2010 and September 2012 for authorizing increase in capital. In short the management of the bank has time and again held and represented to the shareholders of the bank that the holding of the Government will always remain more than 51%.

However as the media reports suggest that the bank will offer equity shares only to LIC on a preferential basis it will bring down the holding of the government below 51%. Consequentially IDBI bank will not remain a “Government Company” and all it’s subsidiaries will cease to be Government Company as defined in Sec. 2(45) of the Companies Act 2013.

Be that as it may, it is perplexing that as per the report of a news agency bank has informed Bombay Stock Exchange that there has been no discussion in the board of the bank about the LIC investment. It is well known that when such preferential allotment is made, the concerned institutions informally reach an agreement on the matter and then proceed to complete the procedural requirements and make legal compliances. IRDA has also not issued any categorical explanatory statement. IRDA Chairman has reportedly stated that whatever decision may have been taken will be put on the web site of the regulator. The statement made by one IRDA member to a business news channel was also short. This gives rise to a piquant question as to how LIC can approach IRDA with a request for an exemption and IRDA takes a decision on the hypothetical issue as the bank itself is stating that there has been no discussion in the board of the bank. All this is perplexing and does not behove government institutions. Even though the amount involved may be miniscule compared the fund corpus of LIC, it is not unnatural that it reminds LIC policyholders of UTI episode of yester years and scares them.

Having regard to the fact that the bank is a Government owned bank, holding of government is likely to steeply go down from current 85.96% to less than 51% and the assurance given to the parliament, Government should immediately make a statement in the forthcoming session of parliament and clear the suspicion from the minds of policy holders, depositors of the bank and the public at large. It should also clarify whether with Government holding going down below 51% and LIC holding going above 51% the bank and it’s subsidiaries will be categorized as public sector institutions, if not Government companies, whether investment of LIC will be a Financial investment or a strategic investment, whether shares will be allotted to other government institutions or will be given to private investors when LIC pares it’s holding in future to 15% as per IRDA stipulation, what was the rationale of IRDA decision granting exemption and whether similar exemption would be available to other private sector insurers and whether LIC will make an open offer to the existing minority shareholders of bank as per SEBI regulations to enable the shareholders to exit if they so wish.

As people have not yet forgotten UTI episode and as the exercise involves policyholders’ money, the process must be done in a fair, just, reasonable and transparent manner.

(The author is a legal consultant and is a former Investment banker)