The Insurance Regulatory and Development Authority (IRDA) on Friday cleared Life Insurance Corporation's (LIC) investment proposal in state-run bank, sources privy to the developments told CNBC-TV18.
The decision, was taken at a the meeting of the Board of Directors of IRDA at Hyderabad. Sources told that insurance behemoth, LIC, can invest up to 51% in IDBI Bank, after all regulatory approvals. LIC currently holds 10.8 percent in the bank.
If the deal goes through, IDBI Bank will get capital support of Rs 10,000-Rs 13,000 crore from the LIC.
A panel of experts comprising MR Umarji, Former Chief Adviser -Legal, IBA, AK Purwar, Former SBI Chairman, Prabal Basu Roy- Management Advisor, Amit Tandon- MD- IIAS, JN Gupta- Former ED- SEBI and R Gopalan, Former Banking Secretary shared their opinions on the deal.
Watch Here: IRDA approves investment proposal in IDBI Bank by LIC
Edited Excerpt:
Shereen: What do you make of this plan, I mean the rationale of the government is LIC has had banking aspirations, we do not want to sell IDBI Bank to a private bank at this stage even though there have been proposals to the government from at least two private sector banks, why should we sell IDBI Bank cheap to a private sector player is the government’s argument, why not give this to LIC and that is how they have structured this and the first regulatory approval has come in from the IRDA. Now of course we require the RBI to come in and of course cabinet approval will be required as well. What do you make of this?
Purvar: If you ask me purely as a banker, my assessment is that IDBI started as a long term lending institution. They focused on providing long term funds to whole host of industries. In fact in 2002-2003, when I was the chairman, and when initially IDBI ran into some issues, I offered to buy IDBI out.
Unfortunately for some reason it did not mature. However the rationale was that IDBI had huge domain expertise in appraisal of long term loans. Barring stray cases and because of economic position and all, the NPAs have gone up substantially, but having said that the domain expertise resides in IDBI even today. If you look at LIC, LIC is having a whole host of long term, very long term funds. I think it is an excellent cultural mix.
Latha: So you are not unhappy with the mix?
Purvar: I am very happy with the mix.
Latha: Looks like the first hurdle has been crossed, IRDA has cleared the LIC-IDBI Bank deal.
Gopalan: As Shereen said, it was expected and it will also go through with Sebi as well as with RBI. That also will get a clearance.
Latha: You think all three regulators will consider it kosher?
Gopalan: I have a feeling that it is going to be cleared by everyone because if the decision has been taken to do this, it will go through all the regulatory approvals. However, it is going to be a great strain on the regulators – three regulators making exception in one single case is unheard of in history but those are all things for learned people to look into, do a research and find out.
Mr. Purvar is a very senior man and I have a lot of respect for him, if he says that the kind of appraisal requirements or appraisal capabilities are still in IDBI, I will be very happy. Unfortunately, that has been getting eroded very badly in the last few years, and therefore if that is the only issue for which IDBI Bank is acquired by LIC, I will have to look at the LIC’s financial health also.
You are taking over an organization, Rs 55,000 crore NPAs, 28 percent gross NPA is there in the bank and you have to put in a good amount of cash. These are all policyholders’ money and policyholders’ money has to have ability to liquidate and then pay them whenever there is a requirement to pay. So you are putting in this money in IBDI, I am not sure how long this will get return from this bank as we go along.
Shereen: On the point that is being raised there by Mr. Gopalan that look this is policyholders’ money, IDBI Bank has seen a loss of Rs 5,700 crore in the last quarter, it is one of the worst performing banks in the landscape today. Why would the government want to broker such a transaction and LIC does not have expertise to run a bank, let alone a bank in a shape as IDBI finds itself in?
Purvar: Mr. Gopalan in some way I would respect his opinion in the sense that policyholders’ money is a money where you have to return back at the time of maturity. Yes, that is a very genuine issue. However, having said that, let us look at the nature of funds which LIC has – 20 year fund, 25 year fund, 50 year funds, where the returns generally been given by LIC – although it is a very respected organization, extremely credible organization, but in terms of percentage of returns, we know it is very close to 10-year bond yield or maybe less sometimes, little above 10-year bond yield.
Latha: Does LIC have a very good record of running LIC Mutual Fund? It is not the best run mutual fund. Does it have a great record of running a housing finance company? LIC Housing Finance does not compare to HDFC, it doesn’t compare to maybe even GRUH Finance. So do you really think that LIC will do a great job of running a bank?
Purvar: To be candid with you, unless and until we give them an opportunity to run the bank – and I would put it this way that there is a substantial amount of expertise available in the market and LIC I am sure must have tapped a lot of senior bankers, erstwhile bankers to help them run the show. Look at the present MD.
Latha: B Sriram has been appointed.
Purvar: Sriram is one of the very capable SBI officers, has an experience of running State Bank of India’s large credit portfolio for a long time and very successfully even in these difficult markets. So if they recruit proper people I am sure that they should be able to do it.
Shereen: Do you believe with Mr. Purvar that LIC should be given the opportunity and this is perhaps the best way forward that the government could get IDBI Bank out of its mess and in fact not have to put in additional capital into IDBI Bank and make it LICs problem?
Umarji: I agree with Mr. Purvar. LIC has investment in so many other banks along with this new bank which they are investing in. They have very long standing experience in dealing with banks and other financial institutions. The only issue involved in this is protecting the interest of the policyholders and protecting the interest of depositors of IDBI. As far as IDBI Bank depositors are concerned, there is no issue.
As far as policyholders are concerned, because you are exceeding the exposure levels in investments, there is a slight deviation from the norm but that is after due consideration by the regulator and LIC would ensure that the affairs of the corporation are managed in such a way that the policyholders interests are not affected and it helps in turning around the bank.
Shereen: The point was raised that LIC sits on the boards of so many other banks, has an investment in a whole bunch of other banks and perhaps that gives it some sort of expertise to be able to take IDBI Bank forward. But what about LICs holding in all of these banks now that it will be the owner of IDBI Bank?
Gupta: My opinion is very simple. It is a simple investment rather than anything else complex. I don't think LIC is going to run this bank on day-to- day basis as a promoter. The bank will continue to run as a professional because till now government was owning 88 or 86 percent of the equity and the bank was being run by the management.
So, there was no day-to-day interference by government on policy. If that is the case and as Mr. Purvar said, B Sriram is an excellent person and he has got a very good reputation and experience, so in that case I don't think there is any issue at all if you look at it as investment. However, the moment we bring many dimensions, the deal looks very different.
Q: It is not an investment, the government is clear this is an acquisition, it is not an investment.
Gupta: I agree, acquisition, but I will put it in another way, it will continue to work like a subsidiary of LIC as LIC Housing Finance is being done. The question that has been raised on the decision of LIC to get into this, I would say we as an analyst, we can never have the vision that investment team on LIC would have had.
It could be a wrong decision or a right decision, we would never know, but I would say that many times it is the stressed assets which can give you long term returns. As Mr. Purvar said, LIC is a very long term investor. Today the banking sector is in a very bad shape and if we do not see any light at the end of 10 or 5 years, I think we are in trouble.
Latha: So far how has Reserve Bank approached one bank holding stake in another bank or one shareholder holding stake in two banks? The philosophy normally has been that if you are owning one bank, then you cannot have more than four or five percent stake, more than 4.9 percent stake in another bank, it can only be a financial investment, and that bears reason because you cannot be sitting in the boards of other banks and own a bank yourself. That certainly looks like conflict, doesn’t it?
Umarji: I do not think in any other bank LIC has controlling interest. It is just an investment.
Latha: It is a shareholder, it has a board seat in Axis Bank, it has a board seat in ICICI Bank, it has a board seat in Corporation Bank.
Umarji: Shareholder is okay. RBI will have to look into this aspect, whether it should be allowed and whether it will adversely affect the working of any bank as a result of the same person controlling different banks. It may involve issues of competition also. RBI will have to look into this aspect and give a clearance.
Shereen: What would you now expect by way of the questions that the other two regulators may ask? We raised some of these issues about conflict and so on and so forth, but what would you now expect because at least one significant hurdle has been crossed?
Gopalan: As far as Sebi is concerned, this offer to making open offer beyond this 26 percent, 25 percent open offer has to be made and that Sebi has powers to waive and they have waived in a few cases. So that should not be an issue.
My only problem is I think the banking regulator will have a lot of issues to deal with and grapple with before permission is given. The kind of restrictions they may put in for the purpose of financial stability, whatever they would put in, we need to see whether that is going to affect the free ability of IDBI Bank to function.
So the kind of restrictions which RBI as a regulator in the interest of financial stability would put in, one needs to see how that is going to impact the function of IDBI Bank.
We will have to wait and see. I am presuming that RBI will also clear it, but when they clear it in the interest of financial stability, the kind of conditions they are going to put in, one needs to see how that is going to impact the functioning of IDBI Bank.
Shereen: You have been writing a scathing piece on LIC taking up IDBI Bank, it is at least going through so it seems, IRDA has given the green signal and now the other two regulators nod is expected.
Roy: I had no doubt that IRDA will be asked to give its consent on this. The primary issues as I raised were effectively, which probably everyone else has, which is to do with the conflict of interest with respect to the existing stakeholders of IDBI which are the policyholders and using their funds, which is their funds in perpetuity, that funds are going for investments which in all probability will not generate returns. Basically that is the issue. So if they are going ahead with it that shows a lot about how independent our regulators are as well.”
Latha: If you are a Prudential ICICI or if you were HDFC Standard Life and you want to have a banking partner, would you choose IDBI? That gives the impression that LIC is actually getting imposed with IDBI rather than choosing on its own.
Roy: Yes absolutely, that is the prime issue. That is precisely the reason why public sector banks or public sector institutions in India get such low multiples consistently in the markets because nobody knows what is going to be the fate of the funds which these companies generate for a particular stake of shareholders and there will be conflict of interest.
Shereen: What do you make of this, one regulator saying alright go ahead, we will wait to see what the other regulators will say about this proposed transaction?
Tandon: My sense is that the regulators will all be in sync at this stage. There might be a little bit of tweaking around. We need to remember that the decision to house IDBI Bank with a safe pair of hands or with someone with deep pockets was actually taken by RBI or initiated by the RBI. The issue they had was that it was IRDA which might become a bottleneck in terms of this happening. So, if IRDA has given the approval, I think RBI is going to be onboard with this.
Shereen: What precedent does this throw up? It looks very clear that the IRDA has made the exceptions as far as this particular transaction is concerned and maybe the other two regulators will make exceptions including SEBI by way of the waiver of the open offer. What kind of a precedent does that set then for the larger corporate landscape?
Tandon: As far as government owned entities is concerned, they are kind of got carve outs throughout, whether it is an open offer which we saw in the case of ONGC-HPCL or whether you see in terms of women on boards, whether it was in terms of the board composition, whole series of things.
Therefore there have been carve outs for the government owned entities and this is just a continuation. Maybe it is far more extensive than what has been given where you have kind of got some administrative fixes in the others but if we go back to ONGC-HPCL transaction, our belief was that merging the two entities might make sense but not the way they had envisaged the structure at that stage.
Again here there might have been some other solutions, maybe they could have merged it with one bank or split up. I think the challenge now is for LIC to think its own ownership role in IDBI Bank versus the other banks through.
I did hear comment in terms of whether they will still have nominees on other banks or they will not have, it not just for RBI but also for LIC to think about this.
The fact that they have got a slew of investments in other banks - where are they an investor, where are they an owner, how are they going to make a distinction between these two roles, will they then by virtue of being a significant owner in some of the other banks, try and push a merger.
Maybe that is what is being left unsaid at this moment by the Government of India that this might be an easy way to kind of start consolidation within the government owned banks, we really don’t know. It could actually go in many directions at this stage.
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