Government to lower stake in IDBI Bank to 49 per cent

Mumbai: The government plans to bring down its stake in IDBI Bank to 49 per cent and will soon start discussions with the Reserve Bank of India on the same.

The government will bring down its stake in the bank either through a strategic sale of a large block of shares to a big investor, while retaining some control, or by way auction through the stock exchange. Discussions with the disinvestment department for offer for sale of IDBI Bank shares have also begun.

The RBI’s approval for strategic sale is necessary because an existing law makes the regulator’s approval mandatory for anyone picking up more than 5 per cent stake in an Indian bank. Right now, the government holds 76.5 per cent stake in IDBI Bank that was set up by the erstwhile development financial institution IDBI in 1993. IDBI merged itself with IDBI Bank in 2005.

IDBI Bank was set up under a separate law, so the provisions of the Banking Regulation Act requiring a minimum 52 per cent government stake in state-run banks does not apply to it.

The proposal to change the character of IDBI Bank was first hinted by finance minister Arun Jaitley last month. He cited the example of Axis Bank that started off as UTI Bank, as one of the models being considered for IDBI Bank. UTI Bank was promoted by a special purpose vehicle of the once trouble-torn UTI and other state-owned life insurance and general insurance companies. Through these institutions, the government still holds a substantial 29.19 per cent stake in Axis Bank, but for all practical purposes, it operates as any other private bank.

At an event late last week, minister of state for finance Jayant Sinha said the government has an historic opportunity to transform IDBI Bank on the lines of Axis Bank.

Recently, Jaitley had also said that the government would look at gradually reducing its stake to 52 per cent in state-run banks barring State Bank of India. The State Bank of India Act requires the government to retain at least 55 per cent stake in the bank. It was not clear from the finance minister’s statement if he was alluding to IDBI Bank when he flagged the issue of the government selling stakes in the state-run banks or gradually diluting its stake, as banks raise more and more funds from the market. Last year, the cabinet had empowered bank boards to raise fresh capital from the market even if it resulted in the dilution of government stake to 52 per cent.