What are the details of the government’s sale of IDBI | Explained

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The government said that the Cabinet Committee on Economic Affairs has delegated powers to the Alternative Mechanism to sell the government’s remaining 15% stake in IDBI Bank through the open market. File | Photo Credit: Reuters

The story so far : The Union Cabinet has approved the sale of IDBI Bank to Canadian company Fairfax Financial Services, marking the largest foreign direct investment in the financial services sector in India’s history. The deal has finally brought to a close the government and Reserve Bank of India’s (RBI) varied dealings with IDBI, which have ranged from bailing it out to desperately trying to turn its fortunes around, and finally selling it.

Like many banks at the time, IDBI ended up giving loans in the mid-to-late 2000s to several entities that eventually failed to repay them, and these loans became non-performing assets (NPAs). These NPAs included loans to Kingfisher Airlines, ABG Shipyard, Winsome Diamonds, and the Videocon Group.

This was not an issue faced by IDBI alone, since the NPA crisis hit the entire banking sector towards the end of the UPA-II government and the beginning of the Modi government, but given IDBI’s relatively small size, it was hit hard.

Between 2010-20, the government of India infused around ₹25,000 crore of capital into IDBI Bank in a bid to keep it afloat. In 2017, the RBI included IDBI Bank in the strict Prompt Corrective Action (PCA) framework that involved several business restrictions aimed at stemming the rising NPA levels and losses incurred by the bank.

In January 2019, the Life Insurance Corporation (LIC) took over a controlling stake in the bank by infusing ₹21,624 crore into it and being allotted preferential shares in return. As a result, the government’s stake in the bank fell below 51% and the RBI classified it as a private bank since then.

IDBI Bank exited the PCA framework in 2021 thanks to its improving financial health.

Under the deal, Fairfax will pay ₹52,878 crore and get 60.72% of IDBI Bank in return. With this, the government’s stake in the bank will fall to 15%, and Life Insurance Corporation’s (LIC) stake will come down to 19%. The government currently holds 45.5% of IDBI Bank, while LIC holds 49.2%.

In its release, the government termed the deal a strategic restructuring rather than strategic disinvestment, saying that it would be the largest foreign direct investment in the financial sector in India’s history.

IDBI Bank, having suffered from poor financial health for years, had been put under a Prompt Corrective Action (PCA) framework in 2017.