A day after the board of Life Insurance Corporation of India (LIC) gave the nod to acquiring a majority stake in the troubled IDBI Bank, the bank confirmed in an exchange filing that it has received a letter from LIC in which the insurer sought to buy 51% controlling stake in the bank.

The exchange filing said, “The bank has received a letter dated July 16, 2018, from Life Insurance Corporation of India expressing their interest in acquiring a 51 per cent controlling stake in IDBI Bank, as a promoter through preferential allotment of shares/open offer.”

IDBI Bank will now need to get the green signal from the government for said deal.

The stake sale in question has come under a lot of criticism from analysts and experts who believe that LIC policyholders’ money should not be used to bail out PSU banks that are in trouble. The IDBI bank stake sale is the latest in a string of investments that LIC has made into PSU banks. LIC has varying stakes across 22 listed public sector banks (PSBs), and its value as on June 29, 2018, was Rs 38,050 crore. A whopping 22.7% lower compared to Rs 49,211 crore a year ago.

InGovern’s Shriram Subramanaian believes that policyholder’s money should not have been channelled into IDBI Bank. “Why should LIC policyholders’ money be used to invest in a bank that is in trouble? It is well known that IDBI Bank has had multiple problems,” he says. “Addressing the issues of IDBI Bank is a different thing, but pumping in policyholders’ money is not justified.”

Subramanian says merging IDBI Bank with another PSU bank was a route that could have been explored instead of relying on LIC to jump in and bail out the bank in trouble. He adds that the non-performing assets and governance issues plaguing PSU banks as a whole needs to be addressed more effectively. “Unless there is true governance reform, there is no real development in the addressing of core issues that impact PSU banks,” he points out. “The government must distinguish its role of manager of a PSU bank, shareholder and policy maker. It should transfer all its shareholdings to a bank holding company to ensure that deals like this are carried out in a more transparent manner.”

Ajay Bagga of OPC Asset Solutions, however, holds a contrarian view. He says there were three options before the government with respect to IDBI Bank. The first was to let IDBI fail, but then bailing out the depositors would become a problem. The other option was to merge it with another PSU bank, but right now the only bank that has the capital and bandwidth for such a merger is probably the State bank of India. The third option was to privatise the bank, but that would resulted in agitation by the bank’s workers; plus, with 30% NPAs, the government would have to sell it at a low price.

“Given that we are in an election year, I think the last option would not have been politically palatable,” Bagga said. “I don’t know why they didn’t explore merging it with an SBI. Maybe they did explore it and SBI was not interested,” he added.

Bagga compared LIC buying IDBI Bank’s stake to the US government bailing out troubled American banks back in 2008. “Eventually, the US government sold off their stake in the banks and ended up making good profits. If you turn this bank around in three years, LIC could make a multi-bagger profit,” he said, adding that there are synergies between the insurer and the bank that could be explored and leverage to boost segments such as the former’s mutual fund offerings.

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