State-owned insurance giant LIC has announced that it will retain part of its stake in IDBI Bank to take advantage of the bancassurance channel.
Along with the government, Life Insurance Corporation (LIC) will also divest its stake in IDBI Bank, but may not exit entirely, LIC Chairman MR Kumar told PTI in an interview.
LIC is currently roadshowing for its first public issue, which will open for subscription on May 4th.
The government has been planning for several years to sell its 45 percent minority stake in IDBI Bank to strategic investors as part of its privatization campaign.
Last week, Tuhin Kanta Pandey, secretary of the Department of Investment and Public Asset Management (DIPAM), said IDBI Bank’s privatization process was underway and that the size of the stake sale would be determined after the roadshow was completed.
IDBI Bank became a subsidiary of LIC effective January 21, 2019 after acquiring an additional 82,75,90,885 shares.
On December 19, 2020, IDBI Bank was reclassified as an associate due to the reduction of LIC’s interest to 49.24% following the Bank’s issuance of additional shares in a Qualified Institutional Placement (QIP).
“Strictly speaking, we are below the threshold of management control, but what the government really means is that management control has to be done in such a way that a private entity takes over and runs the bank and the government derives value from that,” said Mr .kumar.
He continued: “Since LIC is also in the know, my position has always been very clear that we will also divest with the government, but it could be 49%. So it will depend on how this whole transaction plays out and what kind of investors are expressing interest.”
He went on to say that LIC “doesn’t want to hold a large stake” but rather some stakes as it was a win-win for both companies.
IDBI Bank has been the strongest contributor to the bancassurance channel, he said, adding that LIC may not need to own the entire stake for the bancassurance arrangement to go ahead.
Bancassurance is an agreement between a bank and an insurance company that allows the latter to sell its products to the bank’s customers and others through the branch network.
In the past three years, the bank has gained a lot in terms of savings accounts, cash management and premium collection, he said.
“Once you have seen the outcome of the fee-based income from this (arrangement), once the board has recognized that this fee-based income will grow, the bank also wants to have continuity in the relationship,” the chairman noted.
LIC had bought a 51 per cent stake in IDBI Bank for 21,624 crore in 2019 at an average price of £61 per share. However, IDBI Bank Scrip is trading much lower at £45 per unit, suggesting an investment loss for the insurer.
Also, on October 23, 2019, IDBI Bank raised ₹4,743 billion using policyholder funds, while on December 19, 2020, the bank raised an additional 1,435.1 crore through a QIP.
IDBI Bank exited the immediate corrective action framework in March 2021, subject to compliance with certain conditions and ongoing monitoring.
Regarding the initial public offering (IPO), Mr. Kumar said that the pricing of the public offering is very attractive and investors can look forward to returns in the coming years as the company has growth potential.
More than embedded value, look to value for new business (VNB) going forward, which should reach 12-13, he said.
The DNB margin is what investors would pay attention to and it is currently 9 for LIC, he added.
DNB is the present value of expected future income from new policies written during a given period. It reflects the expected added value from the conclusion of new policies during a certain period.
