LIC IPO: Additional capital support to IDBI Bank may have adverse impact, says DRHP of state-run insurer

Any additional fund infusion by Life Insurance Corporation of India (LIC) in its associate, IDBI Bank, may have an adverse effect on the financial condition of the insurance behemoth, according to the recently filed Draft Red Herring Prospectus (DRHP).

LIC had infused Rs 4,743 crore into IDBI Bank on October 23, 2019 using policyholders' funds while the bank further raised Rs 1,435.1 crore on December 19, 2020 by way of a qualified institutional placement (QIP).

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IDBI Bank has come out of the prompt corrective action framework since March 10, 2021, subject to compliance with certain conditions and continuous monitoring, as per the Draft Red Herring Prospectus (DRHP) of state-owned Life Insurance Corporation (LIC).

The government expects to mobilise about Rs 63,000 crore from the proposed Offer-for-Sale (OFS) to meet the lower disinvestment target of Rs 78,000 crore for the current financial year.

"In light of its financial condition and results of operations, we believe that IDBI Bank does not need to raise further capital at this time. However, if IDBI Bank requires additional capital prior to the expiry of the applicable five-year period and it is unable to raise capital, we would be required to infuse additional funds into IDBI Bank, which may have an adverse effect on our financial condition and results of operations," as per the DRHP.

The five-year period would end in November 2023, as LIC got the approval letter from the Reserve Bank of India (RBI) on November 2, 2018 to acquire the additional equity shares in IDBI Bank.

IDBI Bank became a subsidiary of LIC with effect from January 21, 2019 following the acquisition of an additional 827,590,885 equity shares in IDBI Bank, which resulted in the life insurer owning 51 per cent of the outstanding shares in the bank.

On December 19, 2020, IDBI Bank was reclassified as an associate company due to the reduction of LIC shareholding to 49.24 per cent following the issuance of additional equity shares by IDBI Bank in a qualified institutional placement.

"Additionally, the RBI in its Approval Letter has stipulated that either IDBI Bank or LIC Housing Finance Limited, our Associates, will have to cease conducting housing finance activity within a period of five years from the date of the Approval Letter and that housing finance activity shall be conducted only by one entity," it said.

The impact of complying with this requirement of the RBI may have an adverse effect on the financial condition, results of operations and cash flows, it said.

With regard to surplus distribution, it said, the surplus in respect of the participating fund will be allocated between policyholders and shareholders in the ratio of 95:5 for fiscal 2022; 92.5:7.5 for each of fiscal 2023 and fiscal 2024 and then 90:10 from fiscal 2025 onwards.

Till September 2021, surplus distribution for participating funds between policyholders and shareholders in the ratio of 95:5.