Cabinet approves ₹52,878-crore sale of 60.72% stake in IDBI Bank to Fairfax

New Delhi: The Indian government has approved the “strategic restructuring” of IDBI Bank, with the Centre and state-run Life Insurance Corp. of India (LIC) set to sell a combined 60.72% stake to a Fairfax Financial Holdings-backed entity for ₹52,878 crore, the finance ministry said.

The deal would be the largest foreign direct investment (FDI) in India’s financial sector to date, Finance minister Nirmala Sitharaman said after the Cabinet Committee on Economic Affairs (CCEA) meeting on Wednesday. The transaction is expected to be completed in the current fiscal year, capping efforts that began with the Cabinet’s approval for the divestment in 2021.

For the government, the sale could mark a significant step towards completing a long-running disinvestment exercise and generating proceeds from the sale of its stake. LIC will also monetise part of its holding, while both shareholders will retain minority stakes in the bank.

Also Read | CSB Bank merger with IDBI Bank likely after Fairfax deal

Under the approved transaction, the Centre will sell 30.48% of IDBI Bank’s equity and LIC will sell 30.24% to Fairfax-backed 10955230 Canada Inc. Following the sale, the government will hold 15% in the bank and LIC about 19%.

“The winning best offer bid of ₹81 per share was above the benchmark price, as well as the fair value estimates of both the independent valuation agencies. It was, therefore, adjudged to be reasonable and approved,” Department of Investment and Public Asset Management secretary Arunish Chawla said.

Addressing the media on the Cabinet decisions, the Union information and broadcasting minister said the partnership would facilitate the infusion of new capital and pave the way for the largest FDI inflow into India’s financial services sector. Retaining minority stakes would also allow the government and LIC to benefit from the bank’s future growth, the minister said.

Compliance roadmap

Before the transaction is completed, the Fairfax-backed entity will have to submit its credentials to the Reserve Bank of India (RBI) and provide a roadmap for complying with regulatory conditions.

Following the sale, the Centre and LIC will withdraw their nominees from the bank’s board and become public shareholders.

The finance ministry said the government would retain a “serious amount of control” over the restructured bank’s operations through its remaining 34% stake, while the transaction would also help enhance the valuation of its shareholding.

IDBI Bank is a scheduled commercial bank regulated by the RBI. Following a deterioration in its financial health, the bank required repeated capital infusions, initially from the Centre and later from LIC. On 5 May 2017, the RBI placed the bank under its Prompt Corrective Action (PCA) framework, imposing several restrictions in view of its non-performing assets and losses. The RBI lifted the restrictions in March 2021.

Also Read | Banks seek clarity from RBI on new forex curbs

IDBI Bank shares closed at ₹90.44 apiece on Wednesday, up from ₹82.92 a day earlier, amid expectations of Cabinet approval for the transaction.

Fairfax also holds a 40% stake in CSB Bank. It has been given two years to either merge CSB Bank with IDBI Bank or exit CSB Bank to comply with the rule that an entity can be the promoter of only one bank at a time.

IDBI brand name

Under the share purchase agreement, the government and LIC will remain invested for at least three years after the proposed sale, with their combined residual holding at about 34%. The IDBI Bank brand name will continue for the same period, according to a finance ministry statement.

Under regulatory requirements, the strategic investor will have to reduce its stake to 26% over 15 years. LIC’s holding as a non-promoter institutional shareholder will have to be brought down to 15% within two years.

Chawla declined to name the other bidder that submitted a financial bid for the stake, citing a confidentiality agreement. Five players had expressed interest in October 2022, when the government invited expressions of interest. Four were subsequently declared fit and proper, and two submitted financial bids.

Also Read | Private banks’ inoperative Jan Dhan accounts rise led by HDFC Bank, Kotak

The Fairfax-backed entity’s bid of ₹81 per share was above the benchmark price of ₹75.99 and the fair value estimates provided by both independent valuation agencies.

The CCEA has also eased the process for further dilution of the government’s stake. The empowered group of ministers will now be able to decide on the sale of the remaining stake, instead of the proposal being referred to the Union Cabinet. LIC will be free to manage its residual shareholding under its internal procedures, while complying with directions from its regulators, the finance ministry said.