LIC may retain holdings in IDBI Bank for some more time

When the government of India announced that it would do a strategic sale of IDBI Bank, the idea was that both the government of India and LIC will exit the combined 94.7% stake that they held in IDBI Bank. However, not there seems to be a change of heart. At least, the chairman of LIC, M R Kumar, has indicated that LIC may prefer to hold on to some of their stake in IDBI Bank, rather than divesting fully out of IDBI Bank.

One reason that LIC has given for the change of heart is that LIC would like to reap some of the benefits of the bancassurance channel. The reasons are not far to seek. Large private insurers like ICICI Bank, HDFC Bank and SBI extensively leverage on their banking channel to generate leads and prospects for their life and general insurance business. In most cases the product offerings are packaged and that enables easier sale and deeper ROI per customer.

First a little bit of history about the deal whereby LIC acquired IDBI Bank. In Jan 2019, LIC bought an additional 82,75,90,885 equity shares of IDBI Bank to raise its holding above 51%. However, in early 2020, the stake of LIC in IDBI Bank came down to 49.24% following the QIP done by the bank. That is where the holdings stand now and combined with the government holding 45.48% in IDBI Bank, the combined holding stands at 94.72%.

While the government plans to entirely exit its 45.48% stake in IDBI Bank, it will continue to be a significant holder in IDBI Bank indirectly, as even post the LIC IPO, the government would continue to hold 95% stake in LIC. Hence effectively, the government would still hold 46.78% in IDBI Bank. One option is that LIC may reduce its stake in IDBI Bank to around 27.4% so that the government still effectively controls over 26% in IDBI Bank.

Kumar of LIC underlined that their decision to retain some stake in IDBI Bank was driven by strategic considerations. For instance, IDBI Bank has been contributing immensely to the LIC bancassurance channel, and it had the potential to grow the particular channel aggressively in the post-IPO scenario also. Bancassurance refers to an arrangement wherein a bank and an insurance collaborate to sell insurance solutions to bank customers via branch network.

However, Kumar was non-committal on how much stake they would retain as that would be at the discretion of DIPAM. The point that Kumar was trying to underline is that since it was a strategic business partnership between LIC and IDBI Bank, continuing to hold the stake would be a sort of win-win-win for both LIC and IDBI Bank. It will also keep the lenders to IDBI happy as some indirect government stake would be a safety net for them.

LIC, it may be recollected, has already filed the DRHP for the IPO in the month of February 2022 and is likely to tap the market in March 2022. The government plans to mobilise anywhere between Rs.63,000 crore and Rs.78,000 crore in the current financial year. Since IDBI Bank has already come out of prompt corrective action (PCA) framework in Mar-21, it will be able to expand its presence; of course subject to continuous monitoring.