Government seeks relaxation of public shareholding for IDBI

As the government readies to sell its stake in IDBI Bank, there is still an issue of public shareholding norms that needs some relaxation. Initially, it was the plan to make IDBI Bank a test case for privatization of government owned banks. However, that did not materialize and now the government is reconciled to give up a majority stake in IDBI Bank to private participants. Prior to that, the government has sought a clarification from SEBI on the 2-year relaxation in minimum public shareholding (MPS) norms for IDBI Bank once it is privatised.

There is a unique issue of interpretation here and the reason is to do with the ownership structure of IDBI Bank. Listed Indian companies are required to have minimum public shareholding of 25% within 3 years of being listed. Currently, the state run enterprises are already exempted from this requirement. However, in the case of IDBI Bank, LIC holds a bigger stake than the government of India, so IDBI Bank would not strictly qualify as a public sector enterprise. That is the reason government has sought clarification from SEBI on MPS. 

Since IDBI Bank is not a public sector bank (RBI itself has classified IDBI Bank as a private sector bank), the relaxation on MPS will not apply to IDBI Bank. That means; IDBI Bank will have to comply with the minimum public shareholding (MPS) rule within 3 years of being privatised. However, if the government is planning a strategic sale of IDBI Bank to a private sector entity, then this relaxation on minimum public shareholding will sweeten the deal and make it more attractive. That is why the government has sought SEBI clarification. 

In the case of IDBI Bank, as a special case, the government has sought an additional 2 years, which will give the eventual strategic investor a full 5 years to comply with the minimum public shareholding (MPS) rule. In case the exemption is not explicitly granted, the government can request the regulator to treat its shareholding as public holding to meet the criterion. Currently, LIC and the government of India jointly hold over 94% stake in IDBI Bank and they plan to offer up to 60% stake in IDBI Bank through this strategic sale.

In terms of the process flow, the Expression of Interest (EOI) for the divestment process is likely to be invited by October 2022. Currently, the LIC owns 49.24% stake in IDBI Bank while the government owns 45.48% stake taking their total stake in IDBI Bank to 94.72%. Only the remaining 5.28% is with the general public. Currently, both LIC and the government have been classified as promoters of IDBI Bank and would need requisite approvals if their stake has to be reclassified under the extant regulations.

According to experts 94.72% of IDBI Bank is held by the government and LIC and the government already owns 97.5% of LIC. For all practical purposes, IDBI Bank is effectively a government company. By that definition, IDBI Bank should classify as a state-run entity and should qualify for the minimum public shareholding exemption available to state-run enterprises. However, due to LIC ownership it is classified as a private ownership and hence this confusion. The best thing for now is to wait for the clarification from the regulator.

The dichotomy arises in the case of IDBI Bank only since January 2019. That is because, the RBI categorised IDBI Bank as a private sector bank for regulatory purposes with effect from January 21, 2019 after the Life Insurance Corporation acquired the largest stake in IDBI Bank. It must be remembered that between 2010 and 2021, the government has infused nearly Rs27,000 crore as capital to rescue the bank. The exemption should go a long way in getting strategic investors interested.