The next step for the Life Insurance Corporation of India is to approach market regulator Sebi, as the bank, which is also state-owned, is a listed entity.
The LIC board on Monday gave approval to the insurance behemoth to acquire IDBI Bank by raising stake to 51 per cent via preferential shares, economic affairs secretary S C Garg said.
The debt laden bank will issue preferential shares to state-owned LIC to raise capital.
"Most likely that (preferential share allotment route) would be the way. The bank needs capital. They will issue preferential shares that should be the method," said Garg, who is on the LIC board.
"The other one is that they can buy from the government but that does not provide capital to the IDBI Bank and therefore, that is the preferable mode to do it (acquire the bank)," he said after the meeting.
The next step for the Life Insurance Corporation of India (LIC) is to approach market regulator Sebi, as the bank, which is also state-owned, is a listed entity.
Insurance regulator Irdai has already given its approval to the insurer for the stake purchase.
IDBI Bank too has to get approval of its board to sell stakes to LIC.
Garg also indicated the there may not be an open offer as per the Sebi regulations, as public holding in the bank is very limited.
"Open offer may or may not come about. The public share holding is very small. It is only about 5 per cent. And the pricing formula et cetera may not be attractive. But they will go through that process and if necessary they will make that open offer, but it is not a very material issue in this context," he said.
LIC already has 7-7.5 per cent stake in the bank and will acquire the remaining for majority holding, Garg said without giving details about the capital the IDBI Bank would get by selling stakes the insurer.
However, sources said the LIC stake buy will help the bank get capital support of Rs 10,000-13,000 crore.
With acquisition of majority stake, LIC will be able to appoint at least four members on the bank's board, they added.
LIC has been looking to enter the banking space by acquiring a majority stake in IDBI Bank as the deal is expected to provide business synergies despite the lender's stressed balance sheet.
It will get about 2,000 branches through which it can sell its products, while the bank would get massive funds of LIC.
The bank would also get accounts of about 22 crore policy holders and subsequent flow of fund.
Once the deal goes through, IDBI Bank, which is grappling with mounting toxic loans with gross non-performing assets rising to a staggering Rs 55,600 crore at the end of the March quarter, will get much needed capital support to revive its fortune.
Photograph: Danish Siddiqui/Reuters