With IPO and valuation in focus, LIC likely to pare IDBI Bank stake

Life Insurance Corporation of India (LIC) is looking to pare its stake in IDBI Bank, in which it holds a 51 percent stake, a key step for the insurer to spruce up its valuation ahead of its initial public offering (IPO).

LIC's premium collections have seen a decline due to the coronavirus outbreak and a stake sale in tranches will help improve its embedded value and thereby its valuation. Sources told Moneycontrol that the country’s largest insurer will start reducing its stake ahead of its IPO to unlock value and improve its valuation before the IPO.

The government is looking to begin a stake sale in IDBI Bank in March/April 2021 and the LIC IPO is scheduled for FY22. If LIC can pare its stake in tranches of 5-7 percent, this will help increase its valuation before it lists. “The idea is to not hold on to the IDBI Bank investment for the stipulated 12-years and to unlock value prior to that. Since the government is planning to sell a stake, LIC is likely to follow suit so that there is room for potential large investors to come in and value can be unlocked,” said an official.

The government is keen for LIC to start divesting its stake so that the insurer can focus on its core business and also gain financially from the stake sale, a move that will help build financial value for the insurer during its listing on the stock exchanges. However, sources said that the insurer may exit the stake only in tranches to reassure investors.

Amid the Covid pandemic, LIC has seen new business premiums impacted due to the lockdown and restricted public transport. New premiums plummeted 35.6 percent YoY to Rs 12,092.66 crore in November. This proposal needs to be approved by the LIC Board following which the insurer can invite proposals from interested investors.

In response to a query by Moneycontrol, LIC said that while it is evident that it would be paring down its stake in IDBI Bank eventually, the exact timelines and quantum would be decided by the board at an opportune time, adhering to regulatory framework. The insurer also added that based on the conditions set by RBI and IRDAI for stake acquisition in IDBI Bank by LIC, it will take a decision.

"LIC has to necessarily follow regulatory guidelines and our plan for IDBI Bank would be based on the above mentioned directives of IRDAI and RBI," said the insurer in response to a Moneycontrol query. LIC has a 51 percent stake in IDBI Bank, which is among its large investments. In September 2019, the Cabinet announced that LIC would infuse another Rs 4,743 crore into the lender. LIC has already infused Rs 21,600 crore into IDBI Bank earlier.

LIC’s IPO and stake sale

Moneycontrol had reported earlier that LIC’s proposed IPO will be pushed into Q2FY22 since the pandemic has led to a slowdown in the process.

The first step prior to the IPO is determining LIC’s embedded value, following which the insurer will have to bring down its stake in other listed companies to below 15 percent. The LIC Act will then be amended in Parliament. The government is yet to appoint an actuarial firm to determine LIC’s embedded value. The insurer had a balance sheet of Rs 32.8 lakh crore as of Q1FY21.

The embedded value of a life insurance company comprises two key elements. First, it includes the net asset value or the net worth of the company, which represents the market value of the company’s assets attributable to the shareholders. Secondly, the EV also comprises the present value of the company’s future expected profits from its existing business portfolio, as on the date of valuation.

The government plans to eventually offload 25 percent of its stake in LIC through multiple tranches. Ahead of the IPO, if LIC is able to pare its stake in IDBI Bank, this would lead to unlocking of value and help increase the embedded value and consequently its valuation in the market.

Due to Covid-19, LIC’s business in the individual regular premium and group regular premium business has decreased, as per November data. For the April to November 2020 period, new business premium declined 3.76 percent YoY to Rs 1.15 lakh crore.

Will IDBI Bank exit PCA before stake sale?

IDBI Bank is likely to exit the RBI’s Prompt and Corrective Action framework by the end of FY21 said sources close to the development. Currently, while IDBI Bank has reported a profit (Q2FY21), its non-performing assets (NPAs) remain high.

IDBI bank posted a profit of Rs 324 crore for Q2FY21, against a loss of Rs 3,459 crore in the corresponding quarter of the last fiscal. A significant fall in provisions helped the bank report the profit. “Right now, though NPAs have fallen compared to previous quarters for IDBI Bank, they are still way above the comfort level. Hence, LIC wants some comfort on asset quality improvement before the exit so that the IDBI Bank stock is not impacted,” said an official.

IDBI Bank’s gross non-performing assets (NPA) improved to 25.08 percent as on September 2020 against 26.81 percent as on June 2020 while its net NPA ratio improved to 2.67 percent against 3.55 percent, on a sequential basis. Banks that have non-performing assets above 6 percent, have a capital adequacy ratio below 9 percent or have been loss-making for two consecutive years are put under PCA. Lenders in the PCA framework face several restrictions, including restrictions on non-core activities and lending.

LIC’s stake buy in IDBI Bank

The Insurance Regulatory and Development Authority of India (IRDAI) had in June 2018 made an exception when it allowed LIC to hold a 51 percent stake in IDBI Bank. LIC acquired the stake from the government. Insurance regulations state that an insurer can hold only a 15 percent equity stake in an entity to ensure there is no concentration of risk.

LIC said in its response to Moneycontrol that IRDAI had given its approval to the stake purchase on the condition that the insurer will progressively bring down the stake in IDBI Bank. IRDAI had also put the condition of safeguarding the interest of policyholders. This meant taking efforts to maximize returns from the deal so that the returns are commensurate with the average returns from overall investments of LIC.

RBI had given approval for acquisition by LIC on the condition that the insurer will capitalise IDBI Bank adequately to ensure it meets the minimum capital requirements stipulated by RBI for a period of at least five years. The banking regulator had also put the condition that LIC would bring down its stake in IDBI Bank over a period of 12 years, to 40 percent of the total voting paid-up equity capital of the Bank.

In January 2019, LIC completed the deal with IDBI Bank. Under regulatory rules, LIC has 12 years to reduce its stake in IDBI Bank to 15 percent or below. Through IDBI Bank, LIC was able to improve the share of its bancassurance-led business for individual (retail) policy sales. In the April-September period (FY21), the insurer had a premium of Rs 84,833.48 crore from the bancassurance channel (bank branch-led insurance sales channel), which amounted to YoY growth of 25.3 percent.

In an earlier interaction, LIC chairman MR Kumar had said that while the RBI had given LIC a 12-year period to bring down the stake in IDBI Bank to 15 percent, the insurer may not want to wait that long. Among the biggest surprises of Union Budget 2020 was the proposed Initial Public Offering (IPO) of Life Insurance Corporation of India (LIC). With a Rs 32 lakh crore balance sheet as of FY20, even a 25 percent stake sale by the government would mean a bumper listing.

Source: Money Control