State-owned insurance giant LIC said it would retain part of its stake in IDBI Bank to reap profits from the bancassurance channel.
Alongside the government, Life Insurance Corporation (LIC) will also divest its stake in IDBI Bank, but may not exit completely, LIC Chairman MR Kumar told PTI in an interview.
LIC is currently roadshowing for its first public offering, which will open for subscription on May 4.
The government has been planning for some years to sell its 45% minority stake in IDBI Bank to strategic investors as part of its privatization drive.
Last week, the Secretary of the Department of Investment and Public Assets Management (DIPAM), Tuhin Kanta Pandey, said that the privatization process of the IDBI bank was underway and that the proceeds from the sale of the attendance would be determined after the completion of the tour.
IDBI Bank became a subsidiary of LIC effective January 21, 2019, following the acquisition of 82,75,90,885 additional shares.
On December 19, 2020, IDBI Bank was reclassified as an associated company due to the reduction of the stake of LIC to 49.24% following the issuance of additional shares by the bank in the framework of an institutional placement qualified (QIP).
“Strictly speaking, we are below the threshold management control limit, but then what the government really means is that management control must be given in such a way that a private entity takes over and manages the bank, and the government in the process gets value out of that,” Kumar said.
He further stated that “since LIC is also in the picture, my position has always been very clear that we will also give in with the government, but it may be 49%. So it will depend on how any this transaction will proceed and what type of investors are expressing interest”.
He further stated that LIC did not want to “hold a big stake” but a certain stake, as it has been a win-win situation for both entities.
IDBI Bank was the biggest contributor to the bancassurance channel, he said, adding that for the bancassurance deal to continue, LIC might not need to own the entire stake.
Bancassurance is an agreement between a bank and an insurance company, allowing the latter to sell its products to the bank’s customers and others through the branch network.
Over the past three years, the bank has gained a lot in terms of savings accounts, cash management and premium collection, he said.
“Once you’ve seen the outcome of the fee-based revenue that’s flowing from this (arrangement), once the board has recognized that that fee-based revenue is going to grow, the bank would also like to have continuity in the relationship,” the president noted.
LIC had purchased a 51% stake in IDBI Bank in 2019 for ₹21,624 crore at an average price of ₹61 per share. However, IDBI Bank certificates are trading much lower at ₹45 per unit, indicating a loss of investment for the insurer.
Furthermore, it injected ₹4,743 crore into IDBI Bank on October 23, 2019, using policyholder funds while the bank raised another ₹1,435.1 crore on December 19, 2020, through a QIP.
IDBI Bank exited the Rapid Corrective Action Framework in March 2021, subject to certain conditions being met and continued monitoring.
Speaking about the initial public offering (IPO), Mr. Kumar said that the public offering price is very attractive and investors can expect returns in the coming years as the company has potential for growth.
More than the intrinsic value, one has to look at the value for new business (VNB) going forward, and it is expected to reach 12-13 going forward, he said.
The VNB margin is what investors would be looking for, and it is currently 9 for LIC, he added.
VNB is the present value of the expected future benefits of new policies written during a given period. It reflects the additional value that is expected to be generated by writing new fonts over a specified period.