IDBI Bank with the Life Insurance Corp. to keep the struggling lender afloat faces a legal hurdle, with the proposal likely needing an amendment to the law governing investments by insurers.
Three people familiar with the matter told ET that investment rules for insurers prohibit them from holding equity stakes in companies beyond a limit as such holdings could expose policy holders of the insurance company to future risks if the target company were to go down.
Given New Delhi’s reported plans to sell an additional 30 per cent in new shares of IDBI to LIC, even under the special provisions, the insurer would not be able to buy them. It already owns 15.38 per cent in IDBI Bank, which is under the special watch of the Reserve Bank of India’s Prompt Corrective Action (PCA). Banks the RBI suspects are financially fragile have been put under the PCA to ensure they don’t sink.
The Insurance Regulatory and Development Authority (Irdai) board is meeting on Friday, June 29. It is not clear whether this matter will be discussed as no such proposal is put on the agenda.
The Insurance Regulatory and Development Authority (Investment) (Fifth Amendment) Regulations, 2013, allows insurers with assets exceeding Rs 2.5 lakh crore to buy up to 15 per cent equity in a company. Under special provisions, LIC can hold up to 30 per cent stake in a company with approvals from the government, the investment committee and the regulator.
“There is the Irdai operative limit that does not allow LIC to buy higher stakes in banks under PCA,” said a source in the know of the development.
LIC did not comment.
If the government or LIC sends a proposal, the regulator’s norms would be tested. “LIC has no business running a bank with majority shareholding,” said an Irdai official, who did not want to be identified.
But no proposal has been received yet, he said.
According to the Insurance Act, insurers with assets of Rs 50,000 crore to Rs 2.5 lakh crore can buy 12 per cent equity, while a company with assets of less than Rs 50,000 crore can buy 10 per cent equity in a company.
With exemption from the regulator, LIC can go up to 30 per cent, which would mean putting another Rs 3,000 crore to buy an additional 15 per cent in the bank. IDBI Bank has a market cap of Rs 21,177 crore. With gross bad loans of around 27.95 per cent as of March 31, IDBI bank is in the process of selling non-core assets to free up capital and meet regulatory capital norms.
The bank had posted a loss of Rs 5,663 crore in the fourth quarter on higher provisions. It has put the life insurance subsidiary with Ageas and Federal Bank on the block a year ago. However, the deal is still not sealed. The bank has investments in NSE, NSDL, IDBI Federal Life, IDBI Mutual Fund and IDBI Capital Markets, investments the lender could look to sell to capitalise itself.
LIC has been bailing out the government for decades in capitalising state-run banks whenever markets were averse to buying shares in state-run companies. Recent initial public offerings, including that of the New India Assurance, also needed LIC’s help.
Last year, LIC bought an 8 per cent stake in New India Assurance and General Insurance Corporation. While the value of the investment in New India Assurance is down 57 per cent since listing, General Insurance Corporation is down 20 per cent.
LIC had total assets under management of more than Rs 30 lakh crore, including equity and debt. Of the total investment, around Rs 5.74 lakh crore is in equities and Rs 19 lakh crore in debt, which includes central government securities, state government securities and corporate bonds. Of the total debt investments, Rs 4 lakh crore is in corporate bonds.
LIC has gross NPAs of 5.75 per cent and net NPAs of 1.6 per cent. The insurer has made adequate provisions.