Government to give a free hand to new owners of IDBI Bank

The government had recently called expressions of interest (EOI) for the proposed sale of 60.7% stake in IDBI Bank. As per the terms of the EOI, the government and LIC (two of the largest shareholders with over 94% stake in IDBI Bank currently) will be left with just 34% stake in IDBI Bank. But the big question does arise as to whether the government will adopt a hands-off approach after the sale of stake in IDBI Bank or would the government stamp continue to be visible. Remember, the government and LIC would jointly hold 34% stake in IDBI Bank and they have clarified they don’t intend to dilute below this level.

Of course, the new owner with 60.7% holding will still hold the majority stake and can take most decisions on their own. However, the issue is with respect to special resolutions that require 75% of votes to go through. In that case, the government and LIC with 34% holding would still hold the key. In other words, they can still veto special resolutions. However, the government has sought to assure potential buyers that this stake is only to give comfort to creditors and stakeholders and would not amount to any form of interference. In other words, the LIC / government will not exercise its veto power post the sale of IDBI Bank.

In the words of the government, the entire idea of this privatization is to give the incoming promoters a free hand in running the bank. Currently, the government holds 45.48% and LIC holds 49.24% stake in IDBI Bank. The fact that the government is transferring controlling stake of 60.72% is proof enough that the government does not intend to exercise veto power to stall decisions. But the concerns would still be there since the amount involved is quite large and the potential buyer will have to shell out top dollar to buy a controlling stake in the company. How much would they exactly shell out for the stake.

If you go by the current valuations of IDBI Bank, it has a market cap of Rs47,633 crore and the proposed sale of 60.72% stake in IDBI Bank would have a current market value of Rs29,000 crore. However, sources indicate that the government is not interested in exiting the stake without a control premium since it is not just selling a stake but also handing over a controlling stake to the potential buyer. Already several banks, NBFCs and even private equity funds have evinced interested in buying a controlling stake in IDBI Bank. All of them have bene permitted to bid, except for industrial houses, which are explicitly barred.

The government has clarified that the whole idea of transferring management control was to eventually reduce the government involvement in running the day to day affairs of the bank. Hence government would not oppose resolutions, unless there is a very strong reason to do so and in doing so it would just act rationally like any other large shareholder and not to undermine the new owner. In fact, the government is also willing to give an assurance on this front at the RFP or financial bid stage to the qualified bidders for IDBI Bank. Most experts do feel that this should address the core concerns over control.

As per the existing Companies Act 2013, shareholder or a group of shareholders holding 25% stake or more in a company can effectively oppose a special resolution. At this stage, the best the government can do is to assure that LIC and the government would not act in concert to oppose any resolution. For instance, critical decisions like share buyback, loans and investments by company, early removal of auditors and share capital reduction need to be approved by a special resolution, with 75% shareholders voting in favour. That is the bond of contention and the best the government can do is to give higher comfort level.