LIC-IDBI Agreement: Behind LIC Plan to Bring the IDBI Out of a Banking Mess

India's insurance regulator on Friday gave an unprecedented green light to Life Insurance Corporation of India's proposal to buy back IDBI Bank and rescue it from a paralyzing crisis caused by a mbadive increase in doubtful debts.

The board of the Indian Regulatory Authority and Development Insurance (Irdai), which met Friday in Hyderabad, approved the LIC investment proposal as a special case in because of the precarious financial situation of IDBI Bank. The Mumbai-based lender has the highest bad debts in the industry at nearly 28% of total advances and posted a loss of Rs 5.663 crores last year. The IDBI Bank shares have surged on news and the imminent capital injection, which may be worth more than Rs 9,000 crore in one or more installments. This will give the bank a break and give it the means to solve some of its biggest problems. "Irdai's board on Friday allowed LIC to buy back 51% of IDBI Bank's capital," said a member of the executive board who did not want to be identified.

"LIC will have to sell it in the future and bring it back to the regulatory requirement of 15%." This could mean that LIC should start reducing its 51% stake in the next few years and bring it on an equal footing. with standards for other insurers. This is the first time that the insurance regulator has relaxed its investment rules to such an extent. The Insurance Regulatory and Development Regulatory Authority (Investment) Regulation 2013 (Fifth Amendment) allows insurers with badets in excess of 2.5 million crore rupees to purchase up to 15 % shares in a company.

Under special provisions, the LIC may hold up to 30% with the approval of the government, the investment committee and the regulator. The proposal also goes against LIC's own investment mandates, which prevents it from taking control of a company. The fact that this happened may be due to the desperate financial situation of IDBI Bank and the desire of the government to ensure that LIC provide funds for not having to do so.

With LIC spitting money, the government has one less bank to deal with every time it considers the allocation of capital for public sector banks. The Irdai agreement also caps weeks of intense negotiations between the government, LIC and Irdai. While the government was keen to see LIC play an important role, representatives of the insurer and the regulator remained silent on the issue. Some officials also indicated that the proposal would not be kosher, as IDBI Bank is subject to RBI rules on prompt and correct (PCA) and thus may not be a viable investment proposal. for LIC.

Banks under PCA are prohibited from lending, although they can continue to accept deposits. Under normal circumstances, LIC would have had difficulty investing in IDBI Bank. The proposal was also not on Irdai's agenda as it was a regular quarterly meeting of the board set several weeks earlier. . But it was a filed matter that meant board members had to discuss it. The deal may have to cross another regulatory hurdle at the Reserve Bank of India.

"We will have to see what RBI is doing and if RBI will allow them to retain their stake in other banks," said Ashvin Parekh, Managing Partner of Ashvin Parekh. "The government might want LIC to buy shares in more PSB." LIC, which owns 10.82 percent of IDBI Bank's capital, will be able to buy 40 percent more by investing 9,000 crores in the bank. IDBI Bank has a market capitalization of Rs 22,954 crore.

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