State-owned IDBI Bank could make a bulk issue of shares in a preferential allotment to Life Insurance Corporation in order to ensure that the lender gets the fund infusion, a senior finance ministry official said on Tuesday.
The finance ministry is keen that the IDBI Bank gets adequate capital from the strategic sale and preferential issue of shares is an option that the bank is likely to use to raise funds, the official said. Preferential allotment is a process by which allotment of shares is done in bulk by the company to a select group of investors.
“The preferential allotment to LIC may be followed by an open offer that would help protect the interest of minority shareholders,” the official said, adding that the Boards of the banks and the Corporation will take a final call on modalities of the stake sale. As per the Securities and Exchange Board of India (SEBI) Takeover Norms, if an acquirer picks up more than 25 per cent stake in a target company, it is required to make an open offer for other shareholders, including the minority shareholders, to offer them an exit option.
Having been unable to find a suitable private sector buyer for IDBI Bank, the government has prepared a plan under which Life Insurance Corporation will pick up a controlling stake in the bank. Sector regulator Insurance Regulatory and Development Authority of India (Irdai) last month approved LIC’s plan to buy up to 51 per cent stake in the debt-laden bank amid concerns relating to the use of policyholders’ funds for bailing out a bank.
A preferential allotment to LIC will be different from the government selling its stake in the bank to the Corporation. In case the government sells its shares in IDBI Bank to LIC, then the bank does not get any funds and proceeds of stake sale go the government. However, when the stake is acquired by way of preferential allotment, the funds will come to the bank and the existing stakeholders will see their stakes getting diluted. Unlike in the other public sector banks, the government can pare its stake in IDBI Bank to below 50 per cent, because this bank is not governed by the Bank Nationalisation Act, 1969.
While the government holds about 80.96 per cent stake in IDBI Bank, LIC has 10.8 per cent as on March 31, 2018. But after the government’s capital infusion of Rs 7,881 crore in May, its stake went up to 85.96 per cent in IDBI Bank, while LIC would have got diluted in a similar proportion. The finance ministry in June appointed State Bank of India Managing Director B Sriram as MD and CEO of IDBI Bank.
The government has been trying to privatise IDBI Bank over the past couple of years, but mounting losses and rising bad loans have made it difficult to attract buyers. For the year ended March 31, 2018, IDBI Bank’s Gross non-performing assets (NPAs) rose to 27.95 per cent from 21.25 per cent as on March 31, 2017 — making it the worst performing state-owned lender in terms of NPAs. In 2017-18, the bank reported a net loss of Rs 8,238 crore, up from Rs 5,158 crore in 2016-17. Shares of IDBI Bank closed higher 13 per cent at Rs 55.15 at the National Stock Exchange on Tuesday.