The Union Cabinet chaired by Prime Minister Narendra Modi approved the purchase of 51 per cent controlling stake in IDBI Bank by state-run insurer Life Insurance Corporation (LIC). The decision also conveyed no objection to the reduction in the government of India shareholding in IDBI Bank Limited to below 50% by dilution, said a government statement.
It has also approved the acquisition of controlling stake by Life Insurance Corporation of India (LIC) as promoter in the bank through preferential allotment/open offer of equity, and relinquishment of management control by the government in the bank.
This development is likely to make some action in the SENSEX and NIFTY. The stock market investors were waiting for this major development in the LIC-IDBI Bank deal which ultimately reached to them, now there could be some positive action in the stock markets.
According to the statement, the impact of acquisition has wide-ranging synergy benefits for customers, LIC and the bank, as it will benefit the two entities. The move will benefit them from economies of scale, reduction in the costs of distribution and customer acquisition, greater efficiency and flexibility in operations, and greater opportunity for cross-selling of products and services, it said.
These would help financially strengthen both LIC and the bank, as well as their subsidiaries which offer financial products such as housing finance and mutual funds. Further, the bank would get an opportunity to tap 11 lakh LIC agents for doorstep banking services, positioning it to improve customer services and deepen financial inclusion, the statement said. Other benefits of the development are:
1. The bank would be positioned to benefit in terms of lower cost of funds through acquisition of low-cost deposits, and fee income from payment services.
2. LIC would get bancassurance (i.e. selling of insurance products by bank) through the bank’s network of 1,916 branches, besides access to bank’s cash management services.
3. LIC would gain in terms of furthering the realisation of its vision of becoming a financial conglomerate.
4. Customers too would benefit through wider offerings of financial services under one roof, and LIC being better positioned to expand life insurance coverage.
Notably, the Finance Minister, in his 2016 Budget Speech, announced that the process of transformation of IDBI Bank has started and that government will take it forward and also consider the option of reducing its stake below 50%. Taking note of this announcement, with the approval of its Board, LIC sought permission of the Insurance Regulatory and Development Authority of India (IRDAI) to acquire controlling stake in the bank.