IDBI: a necessary evil?

In response to an in-principle approval granted by the Cabinet Committee on Economic Affairs nearly 17 months ago, the government has finally invited bidders to submit expressions of interest by the 31st of December for the acquisition of a majority stake in IDBI Bank. We have already paid a steep price for the repeated bailouts of the bank by the Indian government and the Life Insurance Corporation of India Ltd (LIC). It is time to stop this practice.

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Clearly, the government intends to sell IDBI Bank early next year; however, will it receive a price that is satisfactory? Despite a dark future for countries around the world, India remains a bright spot, according to International Monetary Fund. Having 1,882 domestic branches and 3,400 ATMs, IDBI Bank is poised to attract investors due to the limited number of bank licenses available.

A ‘on tap’ licensing program has been announced by the Reserve Bank of India (RBI) for universal banks and small banks; however, it has found six applications to be unsuitable, and five are still being reviewed. Consequently, the most important question regarding IDBI Bank's divestment is: What price will be offered, and what other concessions and guarantees will be demanded by potential investors who do not represent industry houses?

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Following RBI's prompt corrective action order in 2017, IDBI Bank was rescued by LIC through repeated infusions of funds. LIC will not be the decision-maker in this case. A total of Rs21,600 crore was invested in 2018 by LIC to acquire a 51% stake at Rs61 per share. Another Rs4,793 crore was invested in 2019 in order to write off bad loans. Moreover, the bank has been injected with Rs21,157 crore since 2015, as mentioned by Nirmala Sitharaman to a news agency shortly after the bank had received another Rs4,557 crore in funding. Following the successful raising of Rs1,435 crore via qualified institutional placement (QIP), IDBI Bank finally pulled out of PCA, enabling it to be privatized. As a result, the Bank will incur a staggering cost of Rs49,000 crore, which does not include the sale of valuable legacy investments to be sold. But more on that later.

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In the event that IDBI Bank's financial performance slumps again, privatisation is essential to ensure that it does not become a burden on LIC. This is an expected scenario given the bank's history for nearly two decades. LIC, which went public in May 2020, has already disappointed investors with its shares at Rs949. Stocks have continued to decline to Rs609 (19th October) below the issue price. While IDBI Bank's shares have risen, LIC's investment in the bank is in the red. The stock is currently trading at around Rs43.45, despite the turnaround being touted by the government.?

In the past two years, policyholders who were actively wooed to subscribe to the issue would have been unfairly affected if LIC were to sell below its investment price and dividend (a dividend has not been declared). Privatising IDBI Bank will clear LIC's neck of the albatross and boost investor sentiment. The question is, What price has been paid and at what cost ?

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Divestment Plans

It is expected that LIC and government will divest 60.72% (total 94%) of their stakes. IDBI Bank, a predominantly public sector bank, became a subsidiary of LIC in 2019 and was declared a private bank despite being primarily owned by the public sector. It has had a disastrous journey since it transitioned from a powerful development finance institution (DFI) to a bank.

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An entity called IDBI Ltd was incorporated in 2004 following the repeal of the IDBI Act. In May 2008, the merged entity was renamed IDBI Bank, the wholly-owned subsidiary of IDBI Ltd. The original DFI was merged into IDBI Ltd. This part was relatively straightforward.?

The IDBI bank acquired United Western Bank (UWB) which was placed under a moratorium by the RBI even before it had gained a foothold. This resulted in a rise in bad loans and led to a decline in returns for investors. Rather than providing organic growth benefits, there are serious integration issues.

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A decade later, IDBI Bank continued to suffer bad loans and losses, but it remained afloat thanks to bailouts from the exchequer with little improvement in its accountability.

A number of bailouts led to IDBI Bank's net profit in FY20-21 of Rs1,359 crore, up from Rs12,887 crore in FY20-21. In addition, it has covered 96.9% of its bad loans, making it an attractive investment for potential new owners. As well as reorganizing the business portfolio to focus on retail loans and mortgage financing, the real story has been the infusion of capital and the steady sales of valuable assets.

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In addition to receiving a windfall return from selling its substantial stake in the National Stock Exchange (NSE), the bank also divested its assets in NSDL eGovernance Infrastructure, Ageas Federal Life Insurance Company Ltd, Asset Reconstruction Company (India) Ltd, Stock Holding Corporation of India Ltd (SHCIL), and real estate.?

There will be an additional Rs12,000 crore in bad loans transferred to the National Asset Reconstruction Company (NARCL), reducing its gross bad loans to about 14%. Is this enough to get the right price and attract high-quality investors?

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Right Decisions

Several steps seem to be being taken right by the government, which is good news. As part of the preliminary information memorandum ( https://www.idbibank.in/pdf/IDBI-strategic-Sale-PIM-EOI-DIPAM -7.10.2022.pdf ), legal declarations have been requested from investors confirming that no serious offenses have been committed or that they have not been convicted by a court. As a result, those who are not 'fit and proper' to manage public savings are automatically discouraged.

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As opposed to Yes Bank’s initial bailout, the finance ministry has held road shows and engaged with major foreign investors, including TPG Capital, Carlyle Group, and Fairfax Financial Holding, controlled by the billionaire Prem Watsa of Canada. As a result of a lack of answers to some legitimate questions and concerns during the Yes Bank discussions, some foreign institutional investors walked out.

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In addition, the government and RBI appear more decisive and practical as a result of their willingness to shed pointless reservations. As a result of Prashant Kumar's successful turnaround of Yes Bank, led by the State Bank of India, as well as the sale of Lakshmi Vilas Bank to DBS India, a subsidiary of DBS.

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A major concern for potential investors will be IDBI Bank's chequered history and long-standing poor accountability culture, but a major concern for investors will be the fact that the government and LIC will remain substantial shareholders, with a combined stake of 34%, and may be able to block special resolutions. In order to alleviate concerns regarding management interference, potential bidders may request additional support or assurances from RBI, LIC, and the government; however, these concerns must be addressed in a timely manner.

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There is no alternative to privatizing IDBI. The cost of interminable bailouts is just too high, and the only beneficiaries are large corporate defaulters who are sponging away public funds that can be used for public good.?