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Here’s how much money would LIC make from the sale of its IDBI Bank stake

26 August 20225 mins read by Angel One
Here’s how much money would LIC make from the sale of its IDBI Bank stake
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The chairman of the LIC stated on Monday that the insurer may not sell its full interest in IDBI Bank and that it may offer its insurance services via its huge network of branches. A balance sheet risk is its controlling interest in IDBI Bank, which it saved in 2019.

IDBI Bank, which had assets of over 2.9 lakh crore at the end of December and over 1,800 branches throughout the nation, is owned by the Indian government and the Life Insurance Corporation of India. When the lender was burdened down by poor loans and required a fresh influx of money, LIC took over. For the last several years, the government and LIC have been considering selling their interest in IDBI.

Speaking to the media ahead of the IPO’s debut, LIC’s CEO said that the firm is now well-capitalized and that he does not feel the company needed capital at this time. In the future, if expansion money is required, we would contact all shareholders, not only the government, he stated.

Kumar went on to say that prospective LIC investors shouldn’t be concerned about government control after the IPO since the country’s biggest insurance firm’s board makes decisions, not the government, which would own 95 percent of the business after the IPO.

In response to a question on LIC’s profitability, Kumar said that insurance firms’ measurements of earnings vary from those of other businesses. Kumar further said that LIC may not sell its full interest in IDBI Bank and that the company may advertise its insurance services via its huge network of branches.

LIC may appoint IDBI Bank as a LIC Housing agency

To maintain compliance with central bank restrictions that limit mortgage lending powers to one business in a financial group, LIC is considering making IDBI Bank an agent for obtaining loans for LIC Housing Finance.

If IDBI Bank does not find a buyer by November 2023, LIC has until then to make the move, according to Chairman MR Kumar. The second possibility, Kumar said, is for IDBI Bank to provide loans to LIC Housing. With a loan book of about Rs 2.43 lakh crore, LIC Housing is India’s second biggest non-bank home lender.

While allowing LIC to acquire a majority stake in IDBI Bank in 2018, the Reserve Bank of India stated in 2018 that either IDBI Bank or LIC Housing Finance Limited would have to stop their housing finance business within five years because the housing finance activity would be handled by only one entity.

In January 2019, LIC purchased 827.5 million shares from the government for a 51 percent interest in IDBI Bank. On October 23, 2019, it injected further Rs 4,743 crore into IDBI Bank. After raising Rs 1,435 crore in a qualified institutional placement in December 2019, LIC’s shareholding in IDBI has dropped to 49.24%.

Apart from the Rs 65,000-crore major share sale at LIC, the government’s divestment objective also includes IDBI Bank. The government intends to sell 5% of its stock in the gigantic insurance company.

Kumar expects LIC to go public before the end of the fiscal year, which ends in March. In anticipation of stock allocation, he said, more than 7 million policyholders had connected their plans to demat accounts. Policyholders will get around a tenth of the LIC issue amount. Employees of the LIC as well as policyholders will get a discount on the issuance price.

The company’s embedded value has been set at Rs 5.39 lakh crore by Dipam-appointed actuarial firm Milliman Advisors, up from Rs 95,605 crore at the end of March 2021, owing to a 100 percent rise in shareholders’ interest in non-participating funds.

LIC used to have only one fund, and the valuation excess from both participating (par) and non-participating (non-par) business was split 95:5 between policyholders and stockholders. Investors under participatory policies share in the profits earned by their investments. It’s possible that they are guaranteed returns or ULIP programmes. Non-participatory plans, such as term plans, do not create income.

A change to the Life Insurance Corporation Act has allocated all surplus from non-participating funds to shareholders ahead of the IPO, and the par business ratio would progressively fall to 90:10 by FY25, in line with private sector insurance firms.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

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