WILL INDIAN OVERSEAS BANK BE

PRIVATISED?
LET US SEE WHETHER THE GOVT
CAN PRIVATIZE INDIAN OVERSEAS
BANK!
Social Media is agog with reports that The government is
looking to privatise more than half of the state-owned banks to
reduce the number of state-owned lenders to just five as part
of an overhaul of the banking industry, government and
banking sources said. The first part of the plan would be to sell
majority stakes in Bank of India, Central Bank of India, Indian
Overseas Bank, UCO Bank, Bank of Maharashtra and Punjab &
Sind Bank, leading to an effective privatisation of these state-
owned lenders, a government official said.

"The idea is to have 4-5 government owned banks," said one

senior government official. At present, India has 12 state-
owned banks. The government official said that such a plan
would be laid out in a new privatisation proposal the
government is currently formulating, and this would be put
before the cabinet for approval.

The finance ministry declined to comment on the matter.

The government is working on a privatisation plan to help to

raise money by selling assets in non-core companies and
sectors when the country is strapped for funds due to lack of
economic growth caused by the coronavirus pandemic.

Several government committees and the Reserve Bank of India

(RBI) have recommended that India should have not more
than five state-owned banks.

"The government has already said that there will be no more

mergers (between state-owned banks) so the only option for
them is to divest stakes," a senior official at a state-owned
bank said.

Last year, the government had merged ten state-owned banks

into four, creating a handful of larger banks in the process.

So question that has been asked often is WILL INDIAN

OVERSEAS BANK, in Bank of India, Central Bank of India,
Indian Overseas Bank, UCO Bank, Bank of Maharashtra and
Punjab & Sind Bank, BE PRIVATISED?

I will answer this question in case of my bank Indian

overseas bank

HOW IS ANY ENTITY PRIVATIZED?

An Entity is privatized wholly or completely when 100% of
Govt ownership or control is relinquished or sold to Private
Individuals or players.

96% of IOB is owned by the Govt of India and 1.1% is owned

by the Direct Public.

This means 1580 Crore Shares are owned by Govt of India

Market Price of IOB Shares today is Rs. 11.00, this means the
Govt holding in Indian Overseas Bank is Rs.17000
Crore approximately.

Now the Total Capital of the Bank is Rs. 16200 Crore (The

Paid Up Capital which is the real Capital unlike Authorized
Capital)

The Total NPAS as on date are around Rs. 26000 Crore

So you may ask me Why I am rambling on about

numbers? so i will explain?
Assume you are a Businessman. Would you pay Rs. 17000
Crore to acquire a Bank that has Rs. 16200 Crore in its kitty
but potentially has the ability to lose Rs. 26000
Crore???????????

So assume 50% of these loans become NPAs completely - that

means the Bank has to cough up Rs. 13000 Crore from its
Capital which reduces to Rs. 3200 Crore. So the Businessman
will end up losing Rs. 17000- Rs. 3200 Crore = Rs. 13800
Crore (LOSS)

WHICH BUSINESSMAN IS INSANE ENOUGH TO DO THIS?

Its like paying Rs. 10 Lakhs to acquire a Hotel with Rs. 9 Lakhs
of Assets but which owes Rs. 15 Lakhs of Liabilities. Who in
their right mind would agree to such a deal?

Now let us study another bank - State Bank of India

TO acquire State Bank of India- you need to pay a sum of Rs.

1.7 Lakh Crore

Total Capital of the Bank is Rs. 2.32 Lakh Crore

Total NPAs of the Bank is Rs. 1.49 Lakh Crore

So lets imagine if 50% of the Loans become complete NPAS ,

this means Rs. 0.75 Lakh Crore.

This means the Businessman will end up losing - Rs. 1.70 Lakh
Crore +0.75 Lakh Crore - Rs. 2.32 Lakh Crore = Rs. 13000
Crore (LOSS)

The problem is all PSUs have such huge liabilities that any
businessman or entity which acquires them will be stuck with
tremendous amount of NPAs and potential possibility of losing
a lot of money.

IN SHORT IT IS NOT PROFITABLE

Disclaimer - Modi Govt may still do something stupid

that they always do but it would be yet another disaster.
OTHER POSSIBILITY
LIC did a good thing by investing in IDBI Bank. For a long time
LIC of India wanted to start its own Bank but not getting
licence to start.

Fortunately IDBI bank was available for very little investment

with good base. Government also permitted LIC of India to
increase its stake in the Bank.

LIC of India is sitting with a huge surplus of more than Rs. 25

lakhs Crore. Investing Rs. 15,000 Crore would not make much
impact for LIC of India.

And where LIC of India would invest?

LIC of India board had also approved the decision. Government

of India is not interested to sell IDBI’s stake to private players.
This is how Government of India did two things in one decision
and LIC also got major stake in a bank which is well
established all over India.

There may be other problems like NPA and loss. But this deal
would prove very profitable for LIC of India over the years to
come
Role of government is questionable as the stake belonging to
President of India (people) is being shifted to the LIC
(custodian of public money), this is great news for IDBI
though.

Let us hope that LIC with its immense experience in money

management can do some good for the people of India by
turning around this bank, fingers crossed.

immediately there will be no impact on IDBI Shares - But for

long term investment this is right time to invest because of LIC
buying 51 percent and we all know LIC is the on of the best
Insurance company in India.

Insurance behemoth LIC will acquire up to 51 per cent stake in

state-owned IDBI Bank after regulator Irdai approved the plan
that will help convert the debt-ridden lender into a private
sector entity.

According to sources, the board of Insurance Regulatory and

Development Authority of India (Irdai) in a meeting permitted
Life Insurance Corporation (LIC) to increase the current stake
from 10.82 per cent to 51 per cent in IDBI Bank. This would be
in deviation from the existing rules which restrict any insurers
having stake beyond 15 per cent in the financial firms.

Sources added that if the deal goes through, the IDBI Bank
would get a capital support of Rs 10,000-Rs 13,000 crore.
State-owned 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. For LIC 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 into
their account. “You will get to know whatever is the decision.
You will get to know after the minutes of the Board meeting are
approved.

. As per the present regulation, an insurance company cannot

own more than 15 per cent in any listed financial firms. “In the
case of entities from the financial sector, other than regulated
or diversified or listed, the limit (for insurance companies) shall
be at 15 per cent of the paid-up capital,” as per the guidelines
for listed Indian Insurance Companies, 2016.

According to the Insurance Act 2015, “Without prejudice to

anything contained in this section, the Authority (IRDAI) may,
in the interests of the policyholders, specify by the regulations,
the time, manner and other conditions of investment of assets
to be held by an insurer for the purposes of this Act.” If 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 latest March quarter
would get much needed capital support to revive its fortune.
During the three months, the lender’s net loss stood at Rs
5,663 crore.
The government would not get the proceeds from the stake
reduction as the money would be utilised for the bank’s revival.
It could happen through issuance of fresh equity so that the
government’s stake which is presently at 80.96 per cent would
come down below 50 per cent as announced in the Budget. A
possible scenario would be the insurance major making IDBI
Bank as a subsidiary on the line of its housing finance and
mutual fund businesses. According to the sources, there would
be business synergies in case the LIC-IDBI Bank deal
materialises. In his Budget speech for 2016-17, then Finance
Minister Arun Jaitley had said the process of transformation of
IDBI Bank has already started.

“Government will take it forward and also consider the option

of reducing its stake to below 50 per cent,” he had said.
Analysts opined that going forward, IDBI Bank investors are
likely to see good appreciation of their investments due to
various factors, including resolution of bad loans. Last year,
Jaitley had said that India is not ready for privatisation of
public sector banks and their present characteristics would
continue except for IDBI Bank. Earlier this year, the
government infused Rs 10,610 crore into IDBI Bank.

The idea of ownership and management control needs to be

clear here. LIC is owned by Government of India (GoI) but it is
not the GoI itself. It is a company that in principle has the
power of making decisions in the best interests of the
company. Although GoI being the majority stakeholder can
exercise significant control over decision making.

In a company, as long as the government owns above 50%

stake (which means majority stakeholder), it is considered
under the management control of GoI and the employees enjoy
their status as public sector employees with significant benefits
akin to a government employee itself and sometimes even
more (eg ONGC or IOC). Though in principle they are not direct
government employees as such (An example would be an
employee in ONGC who is a PSU employee in comparison with
an employee in the irrigation department of central
government who is a government employee)
BUT A SUBSIDIARY OF LIC CAN BE A PRIVATE ENTITY
AS THE MAJORITY STAKEHOLDER IS LIC AND NOT THE
GOI DIRECTLY. THIS IS BECAUSE LIC IS AN ENTITY
THAT CAN MAKE DECISIONS FOR ITSELF. LIC HOUSING
FINANCE IS A LISTED COMPANY ON THE EXCHANGES
BSE / NSE WITH LIC AS THE MAJORITY STAKEHOLDER
AND YET IT IS PRIVATE (AS A SUBSIDIARY OF LIC).

But there is a big caveat in the deal wherein LIC will not be
given management control of IDBI bank as it did not get
approval from IRDA which is the insurance sector regulator
(akin to RBI in banking sector) for the management control.
The final status of the entity and it's employees remains
unclear at the moment although most probably IDBI will
continue to function as a PSU bank.

Update on 16 March: On 14 March, RBI effectively

categorised IDBI Bank as a Private bank. Thus, the employees
of IDBI are now private sector employees. So, the
management control indeed gets transferred to LIC in the end.
But the transition in functioning as a private entity will take its
time.

Update 2 as on 26 March: The employees retain their status

as Public sector bank employees and there is no threat to any
job. So, the employees shall continue to enjoy Public sector
bank status even though it is classified as a Private sector bank
by RBI.

Once this process I complete I think this LIC –IDBI merged

bank may subsume minions like IOB as this merged mega
entity alone has capacity and credibility and insight to oversee
after effects of such mergers.

So we can expect reverse mergers phenomena private bank

taking over nationalised banks in the coming days.

Keep the fingers crossed.

I wish I am proved wrong ?

S.Srinivsan
Fr.General Secretary of recognised union of IOB for 25 years