IDBI Bank: A dilemma of ‘parallel sales’

A buyer of the government’s stake will have to contend with simultaneous market sales by the other major shareholder, LIC

In another era, the strategic sale of IDBI Bank would have attracted a lot of interest for the treasure trove of information it contains on the Indian financial sector. Not anymore. Now, there will be a different sort of interest in this sale — specifically, the game the strategic investor may have to play in the market to win this trophy.

Here’s why. In January 2019, LIC, India’s largest insurance company, had bought a majority 51 per cent stake in the bank by buying an additional 44 per cent stake to its existing holding of seven per cent. At present the Government of India holds 45.48 per cent in the bank, and LIC now holds 49.24 per cent. That LIC has been snipping its shares in IDBI Bank over the past two years so that its shareholding has dipped below 51 per cent was known. With cabinet approval, the insurer will now sell even larger chunks in the market before IDBI Bank meets its suitor.

So the road map ahead for IDBI Bank looks something like this. The government will hold on to its stake in the bank to offload only to a strategic investor. Meanwhile, LIC will steadily sell its stake in the market, creating a parallel process even as the government hunts for a suitor.

This could push up costs substantially for the buyer of the government’s stake. For any sale of shares in an Indian bank of 5 per cent or more, prior Reserve Bank of India (RBI) approval is mandatory each time. LIC should have no problems obtaining those approvals. Yet, every time it will sell tranches of those shares, possibly of 5 per cent or more, the costs for the strategic investor would almost certainly rise.

If the potential buyer of the bank waits on the sidelines, it means when it gets the government’s stake of 45.28 per cent, it could potentially face a rival with a shareholding of almost similar size. Just buying the government stake does not offer the buyer a majority in the boardroom.

To forestall it, the buyer will have to demonstrate interest in public and pick up a large percentage of shares from the market. Also, any buyer of the bank will have to make an open offer to buy at least another 25 per cent from the market.

Both circumstances make it extremely lucrative for those with no strategic interests to bid up the price of the IDBI Bank share. The only way this scenario may not play out is if LIC and the Government of India both sell their holdings at the same time. This is unlikely to happen, because LIC is keen to divest its stake in IDBI Bank before it lists itself. Which means LIC will offload IDBI Bank shares through FY22.

This is partly why news of the government’s plans saw IDBI Bank’s share price rise 15 per cent on the day. There is little other reason for this jump. The bank has turned in a net profit of ~1,359 crore for the first time in five years. It had posted a net loss of ~12,887 crore in FY20. It entered the RBI’S version of intensive care unit, the prompt corrective action (PCA) framework, only in March this year.

IDBI Bank’s thin shareholding structure offers no clue to how this game will be played (see chart: Holding pattern). The 36 institutional shareholders hold 1.56 per cent of the shares, while noninstitutional investors hold a 3.58 per cent stake. Expect more gyrations as this two-track disinvestment winds its way through the markets.

In fact, IDBI Bank appears to be a “Plan B” as far as the government’s FY22 divestment target of ~1.75 trillion is concerned. Recently, the finance ministry cleared access to the data rooms by interested bidders for state-owned oil refiner BPCL. The LIC public offer is expected to be close to ~1 trillion and the BPCL strategic sale should fetch upwards of ~50,000 crore, which means the finance ministry should be able to meet almost its full-year annual target from just these two transactions.

But IDBI Bank’s divestment saga could be almost as interesting as the history of the bank or its predecessor, the development finance institution IDBI. Way before LIC became the go-to company for successive governments to bail out companies, IDBI performed the same function. The National Stock Exchange, the National Securities Depository Services Ltd, Stock Holding Corporation of India and plenty more have all been incubated by it. At one stage, there was also a plan to merge another long troubled state owned entity, IFCI, with it.

For these and other reasons, IDBI Bank has often remained the preferred appointment for the big names of the financial sector. M Damodaran moved to Sebi from the bank, while Mahesh Kumar Jain, MD and CEO, became deputy governor of RBI.

The bank began its life as a private sector entity in 1994 as an IDBI subsidiary and became a public sector bank once IDBI was merged with it in 2003. Once LIC acquired a majority stake in the bank, the RBI announced that IDBI Bank had become a private sector financial institution since January 2019. So the strategic disinvestment in the bank will not change its status again. But if the initial market interest in the announcement is any indication, it can be guaranteed to attract bidders in droves.

The govt will hold on to its stake in the bank to offload only to a strategic investor. Meanwhile, LIC will steadily sell its stake in the market, creating a parallel process even as the govt hunts for a suitor