State-owned insurance behemoth LIC has said that it will retain part of its stake in IDBI Bank to reap the benefits of the bancassurance channel.
Along with 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 doing roadshows for its maiden public issue, which opens for subscription on May 4.
The government for the past few years has been planning to sell its 45% minority stake in IDBI Bank to strategic investors as part of its privatization drive.
Last week, the Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey had said the IDBI Bank privatization process was underway and that the quantum of the stake sale would be determined after the completion of the roadshow.
IDBI Bank became a subsidiary of LIC with effect from January 21, 2019, following the acquisition of an additional 82,75,90,885 equity shares.
On December 19, 2020, IDBI Bank was reclassified as an associate company due to the reduction of LIC shareholding to 49.24% following the issuance of additional equity shares by the bank under a Qualified Institutional Placement (QIP).
“Strictly speaking, we are below the threshold limit of management control but then, what government really means is that management control is to be given in such a way that a private entity picks up and runs the bank, and government in the process gets value out of that,” Mr. Kumar said.
He further said that “since LIC is also in the picture, my stand has always been very clear that we will also divest along with the government, but it may be 49%. So, it will depend on how this whole transaction plays out and what kind of investors express interest”.
He further said LIC does not want to “hold a big stake” but some holding as it has been a win-win for both entities.
IDBI Bank has been the strongest contributor to the bancassurance channel, he said, adding for the bancassurance arrangement to continue LIC may not require to hold the entire stake.
Bancassurance is an arrangement 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.
In the last 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 result of fee-based income coming out of this (arrangement), once the board has recognized that this fee-based income is going to grow, the bank would also like to have continuity in the relationship,” the chairman noted.
LIC had bought a 51% stake in IDBI Bank in 2019 for ₹21,624 crore at an average price of ₹61 per share. However, IDBI Bank script is trading much lower at ₹45 per unit, indicating investment loss for the insurer.
Besides, it infused ₹4,743 crore in IDBI Bank on October 23, 2019, using policyholders’ funds while the bank further raised ₹1,435.1 crore on December 19, 2020, by way of a QIP.
IDBI Bank has come out of the prompt corrective action framework in March 2021, subject to compliance with certain conditions and continuous monitoring.
Talking about the initial public offering (IPO), Mr. Kumar said the pricing of the public offer is very attractive and investors can look forward to returns in the years to come as the company has potential for growth.
More than the embedded value one should look at the value for new business (VNB) going forward, and it should reach 12-13 in the future, he said.
VNB margin is what investors would be looking at, and it is 9 for LIC at present, he added.
VNB is the present value of expected future earnings from new policies written during a specified period. It reflects the additional value expected to be generated through the writing of new policies during a specified period.