The government noted on 7th January, 2023 that it had received several EOIs (or Expressions of Interest) for the disinvestment of its stake (as well as that of the LIC) in the Industrial Development Bank of India. The announcement was made, including through a tweet, by the Department of Investment and Public Asset Management. The tweet also said that the process has now entered the second stage, i.e. when the bidders will go through the due diligence process in order to finalise their bids.
Run up to the divestment
The government and the Life Insurance Corporation of India (LIC) had invited bids from potential buyers in October last year for the stake sale. The deadline for the submission of IDBI EOIs had been extended from the earlier date of December 16th to January 7th.
The DIPAM had said that potential investors in the IDBI bank must have a minimum net worth of Rs. 22,500 cr and they must have reported a net profit in 3 out of the preceding 5 financial years. Investors could bid in consortium, whereby a maximum of 4 members would be admitted per consortium.The successful bidder would have to abide by a mandatory lock-in period of 5 years from the date of acquisition for at least 40% of the equity capital.
However, the DIPAM is going to let the market decide the price that will result from the disinvestment. Moreover, IDBI bank itself enjoys an exemption from Minimum public shareholding norms till 2024.
The government’s permission to allow foreign funds and investment entities registered outside India to acquire 51% stake or above in the IDBI has generated an even greater amount of interest in the deal among potential investors. The Securities and Exchanges Board of India has allowed the government’s stake in IDBI bank to be declared as public after the stake sale.
However, the bidders will indeed be vetted based on the RBI’s ‘Fit and Proper Criteria’. Thereafter, the confidential information of the bank will be shared with the bidders. The names of the bidders have not yet been disclosed.
The numbers game
The total sale of stake will amount to roughly 60.72% of the IDBI bank. The Union government currently owns around 45.48% of the bank and it will sell a total of 30.48% stake (Thus leaving it with 15%). On the other hand, the LIC owns around 49.24% of the IDBI bank, but will be selling off 30.24% (thus leaving it with 19%).
IDBI is a company worth around Rs. 59,729 cr – the IDBI share price is currently hovering at Rs. 55.50 (thus giving a 17% return in 1 year). It enjoys a net interest margin of 3.59% and a net profit margin of 13.33%.
The DIPAM Secretary Tuhin Kanta Pandey said that the government hopes to conclude the IDBI stake sale to be concluded by the end of the first half of the next financial year. The divestment department had set a target of Rs. 65,000 cr of divestment for the financial year 2022-23, of which only Rs. 31,110 cr has been divested so far. The next PSU that they are considering disinvesting from is Hindustan Zinc.
Disinvestment, especially divestiture, becomes useful when an umbrella organisation (in this case, the Union Government of India) has too much on its plate and needs to let go of certain subsidiaries in order to prioritise and focus on others. There have been calls since the early 2000’s for the Indian government to focus more on regulation and less on execution of businesses.
Disinvestment will slowly open up PSUs to public trading of shares, thus increasing the supply of investment avenues. If you want to take advantage of the various opportunities already present in the stock market in India, open demat account with Angel One, India’s trusted broker.
Disclaimer: This blog is exclusively for educational purposes. The securities quoted are only examples and not recommendations.