PSU Bank
Stressed asset fund: a pill for India's bad loans? [Representational Image]: Commuters walk past a bank sign along a road in New Delhi, India, 25 November, 2015.Reuters

The government's announcement in the budget of taking forward the process of transformation of IDBI Bank and reducing its stake to below 50 percent has set investors vying for a share in the bank, the Mint reported. 

The International Finance Corporation (IFC), the World Bank's private investment arm, and the UK's development finance institution CDC Group Plc have been at the forefront of inspecting the bank's assets and liabilities and carry due-diligence, highlighted the daily. 

Bloomberg had reported last week that another U.S.-based private equity firm TPG Capital too is chipping in to hot up the race. 

The budget announcement will be a curious test for the government's ability to pursue the politically sensitive plan to privatise the public sector bank, noted the Mint report. 

First of its firefighting strategy was to include the privatisation plan in the budget document, a finance bill, thereby limiting the scope of the upper house (Rajya Sabha) to just a debate (not vote) where the opposition enjoy a majority, the daily added.

One of the two IDBI insiders who confirmed the names of the participating institutions said the government's action and intention are clear on offering a strategic sale.

"The government is ready to share management control and offer board seats to the strategic partner," the person said, and added that the quantum of stake sold to a strategic investor will likely be 15% or higher. 

Regulatory Issue

But acquiring a bank in India is tied to a Reserve Bank of India (RBI) rule that non-promoter institutions cannot hold more than 10 percent in an Indian bank without permission (for non-promoter, non institutional investor the limit is set at five percent). 

Assuming the RBI relaxes this rule, it still prohibits more than 10 percent voting rights in a bank. No acquirer would like to see a situation of higher shareholding but limited voting rights, added Harish H.V, partner at Grant Thornton India Llp, a financial advisory, reported the Mint.

"But if the government is willing to sell majority control and make an exception then it will be a different case, though that seems highly unlikely to be done for one case," he added. 

Any strategic investor picking up 25 percent or more will voluntarily have to buy an additional 26 percent from shareholders by making an open offer, according to the Securities and Exchange Board of India's takeover code. 

Valuation of IDBI

Two of the IDBI insiders also told the Mint that the bank has submitted a valuation report to the government based on the SEBI's (capital market regulator) pricing formula. Called the SEBI ICDR (Issue of Capital and Disclosure Requirements) Rules, it stipulates that the "shares shall not be priced below the average of weekly high and low of the closing prices during the six months preceding the relevant date." 

Alternatively, the disclosure require that shares will be priced based on the average of the weekly high and low of the closing prices of the shares during the two weeks preceding the relevant date.

Stocks of IDBI Bank touched a high of Rs 95.70 and a low of Rs 47.40 in the past 52 weeks. Currently, the bank's share prices are trading around Rs 68 on the stock exchanges, and that could value the government's stake in the company at approximately Rs 10,227 crore. 

Harish, partner at Grant Thornton India, told the Mint that, if concluded, the transaction can fetch the government a reasonable premium, helping its fund infusion into state-owned banks.