Govt eyes ‘control premium’ to part with its stake in IDBI Bank

The government wants a control premium to part with its holding in and is likely to retain a partial stake even after the transfer of management control, as it prepares for the lender’s divestment, multiple people familiar with its thinking said. This is because the weighted average cost of acquisition of the government’s current shareholding in the bank is much higher than the prevailing market value of its shares.

This has weighed on the finance ministry’s calculations on an exit, as considerations around recovery of its investment are among issues being deliberated. This is also one of the reasons it wants to hold on to a partial stake in the bank, as it hopes to recover some more of the investment by selling it when the share price improves, according to the people cited earlier. No decision has been made on the stake likely to be held after the bank’s privatisation.

According to government and stock exchange data reviewed by ET, the government has pumped in ₹27,000 crore into

Bank between April 1, 2010 and March 31, 2021. Data show the government acquired 4.5 billion shares in IDBI Bank during this 11-year period. This brings its weighted average cost of acquisition to ₹60 a share.

IDBI Bank’s stock closed at ₹36.45 Monday on the BSE. Assuming the government were to sell the acquired shares at Monday’s closing price, it would fetch about ₹16,500 crore, implying a loss of more than ₹10,000 crore on the cost of its investment.

“The capital infusion was done so that banks do not breach any regulatory norms. There is a view that some stake should be retained in order to cash in on the upside as IDBI’s financials improve further,” said an official.

The government is also of the view that a turnaround in IDBI Bank’s performance over the past two years warrants the demand for a premium from a buyer.

, too, has indicated it will not like to completely exit out of the bank unless it gets a substantial return on its investment,” the official added.

The government currently holds a 45.48% stake in IDBI Bank, while LIC owns 49.24%. Based on its closing price on Monday, the bank is valued at just over ₹39,000 crore ($4.9 billion).

LIC had also pumped in over ₹25,000 crore in IDBI Bank over the past six years. Its average cost of investment was around ₹53 per share, as per ET’s estimates.

An executive aware of the government’s thinking offered a contrarian view, saying it would follow Sebi guidelines on floor pricing for preferential allotment while determining its sale price.

The people also pointed out that the government’s cost of acquisition of shares could be even higher than ₹60 because its purchases of IDBI Bank’s shares were funded by issuing bonds that were subscribed to by the bank. These bonds bear a coupon which the government is still servicing.

“The acquisition cost will be much higher if the interest payout by the government on recapitalisation bonds is included,” said an official aware of the matter.

IDBI Bank came out of RBI‘s prompt corrective action framework in the financial year 2020-21. It has posted ten successive quarters of profit starting from the January-March quarter of FY20.

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