The relationship between LIC and IDBI Bank

What are the plans for the bank in the context of the upcoming LIC IPO? Is the bank still in a financially precarious situation?

The story so far: State-owned Life Insurance Corporation of India’s (LIC) draft red-herring prospectus (DRHP) listed IDBI Bank under ‘Risk Factors’. With the insurance company heading for an IPO, its approach in dealing with IDBI Bank would acquire more attention. Presently, the bank is an associate of LIC, with the latter owning 49.24% of the bank.

LIC acquired about 82.8 crore outstanding equity shares in IDBI Bank on January 21, 2019. The transaction resulted in the insurer gaining 51% ownership of the bank. In November 2018, the Reserve Bank of India (RBI) granted approval to LIC for acquiring additional equity shares to initiate remedial measures and restore the bank’s financial health. The insurance company infused a total of ₹4,743 crore into the bank on October 23, 2019, using policyholders’ fund. Further, LIC mentions in its DRHP, that the bank has raised approximately ₹1,435.1 crore by issuing shares to the public via Qualified Institutional Placement (QIP).

In December 2020, IDBI Bank was reclassified as an associate company when the corporation opted to reduce its stake in the bank to 49.24%. A subsidiary refers to a business where the parent company holds a majority stake. Associate refers to a business where the parent company holds a minority position.

LIC’s DRHP stated that IDBI Bank had emerged out of the corrective framework, as put forth by regulations of the RBI, since March 10, 2021.

The Cabinet Committee on Economic Affairs, in May 2021, gave its in-principle approval for strategic disinvestment and transfer of management control of the bank. The committee expected the strategic buyers to infuse funds, new technology and best management practices for the growth of the IDBI Bank. Additionally, the committee expected the strategic buyer to reduce the bank’s dependence on LIC.

The Government of India has a 45.48% stake in the IDBI Bank.

LIC has stated in the DRHP that IDBI Bank does not need further capital infusion at present. However, it would be required to infuse additional funds in case the bank requires additional capital prior to the expiry of the applicable five-year period and is unable to raise capital. The state-owned insurer stated this would have an adverse effect on its financial condition and results of operations.