Foreign-Owned Investment Vehicles Can Buy Majority Stake In IDBI Bank

Around 10 days before IDBI Bank Ltd. receives an expression of interest from potential investors, the central government has clarified that investment entities owned by foreign investors can buy a majority stake in the lender.

The Reserve Bank of India’s residency criteria would not apply to any consortium, which involves foreign funds or investment vehicles registered outside India, the Department of Investment and Public Asset Management said in a clarification issued to investors on Tuesday.

The RBI’s 2016 guidelines for on-tap licensing of new private banks require that the promoters of such banks must be controlled by residents of India. However, the government clarified that the guidelines are specific to new and prospective private banks. Since IDBI Bank is an existing lender, the residency norms would not apply for it.

To be sure, foreign funds are currently allowed to buy stake in a private bank and such banks can raise foreign capital, up to 74% of their equity base, under the foreign direct investment route. However, individual foreign investors can only hold less than 10% stake in a bank.

According to a person closely involved with the bidding process, who spoke on the condition of anonymity, the government’s clarification essentially opens up the process for alternative investment funds, which carry majority foreign ownership. With this clarification, technically, an AIF can buy the entire stake on sale.

The government and Life Insurance Corp. of India have placed 60.72% stake in IDBI Bank on sale, under this process.

The current deadline for submission of EOI is set for Dec. 16.

Among the other issues, prospective bidders asked if they are required to maintain 40% stake in IDBI Bank for five years. In a hypothetical situation, where the investors hold stake in IDBI Bank through a non-bank finance company and their stake is diluted because the NBFC is merged with the bank, will the investors be in breach of the ownership guidelines, they asked.

The government clarified that such situations will be dealt with on a case-to-case basis, with due consultation with the RBI.

In the quarter ended September, IDBI Bank reported a net profit of Rs 828 crore, up 46% year-on-year. The bank’s operating profit rose 64% to Rs 2,208 crore. It had a loan book of Rs 1.47 lakh crore, where 65% of the assets were non-corporate.

Gross non-performing asset ratio stood at 16.51%, down 339 basis points sequentially, while net NPA ratio stood at 1.15%, indicating strong provisioning buffers.

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