By Consultants Review Team
The Union government may postpone the $4 billion IDBI Bank privatization scheme over concerns that the unprecedented market volatility could deter consumers, two people familiar with the matter said. “The market volatility and the frailty in IDBI Bank’s stock mean a much higher dilution in the government’s stake. The government may get a much lower value from the total 60.72% stake sale than what it expected earlier. In such a circumstance, the government is thinking of putting the divestment plan on hold," one of the two people cited above said on condition of anonymity.
“Also, due to the volatility and the fall in IDBI Bank stock, investors themselves are not too keen to spend any significant amount on any large acquisitions or even otherwise," said the person, who is directly aware of the government’s discussions regarding IDBI Bank privatization. An email sent to the ministry of finance for comments remained unanswered. The IDBI Bank divestment is the government’s first privatization plan in India’s banking space. The government has been expecting a valuation of at least $4 billion for its 60.72% stake in IDBI Bank to be sold in the first half of FY24. However, privatization is unlikely to fetch this valuation in the current market scenario.
If the exchequer decides to go ahead with the divestment despite the market weakness and the prevailing low stock price, the government will need to accept a sharply lower valuation of around $3 billion, for which the government is not keen, the two people said. The government has altered its plan now. The upcoming general election in 2024 is expected to bring market stability, and the government may take up large divestment plans such as IDBI Bank with more certainty after the polls, the two people said. From a high of Rs 62 on 9 January, IDBI Bank stock has fallen to Rs 44.40. Consequently, the market value of IDBI Bank has fallen steeply from Rs 66,665 crore to around Rs l49,000 crore now.
At the current price, the government and state-run Life Insurance Corp. of India (LIC) will have to sell at least 68% to fetch $4 billion. In fact, IDBI Bank’s stock performance has been worse than its private bank rivals since the beginning of 2023. Even after falling over 28% since January, IDBI Bank’s price-to-earnings ratio (a key yardstick to estimate an entity’s fair valuation) is higher than most of its peer banks, which may turn the bank’s stock unattractive for any investor either in the secondary market or in the primary market for any majority stake acquisition.
At 13.64, the overall Indian banking sector’s price-to-earnings ( P/E) ratio is more attractive than IDBI Bank currently. Also, shares of IDBI Bank have underperformed other listed banks over the last three months. The high P/E suggests that IDBI Bank may be headed for more correction, which means even lower returns for investors. These factors have compelled the government to rethink IDBI Bank’s privatization strategy and the timing of the divestment, the first person said. To be sure, the government has received EoIs (expressions of interest) from prospective buyers for the IDBI Bank stake.
“The bids received from the potential buyers and the transaction terms may be negotiated again in fresh discussions once the market stabilizes and the government feels the timing of the divestment is correct," said the second person. The government and LIC together are looking to sell 60.72% of IDBI Bank and had invited bids from potential buyers in October. LIC and the government currently hold 49.24% and 45.48% stakes, respectively, in IDBI Bank. The remaining 5.28% stake is with the public.
The Centre has plans to divest a 30.48% stake, while LIC will offload 30.24% in IDBI Bank. After the stake sale, the government’s and LIC’s stake jointly will come down to 34% from the current 94.72%. The government has been attempting to sweeten the IDBI Bank stake sale deal for suitors. Despite protests against privatization from the bank’s employees, the government has clarified that following the privatization, neither LIC nor the government will have any say on the bank’s functioning.
However, for any deal to go through, “valuation will be the key", said the first person. “On one hand, global investors across markets have turned cautious on any large stake purchase. On the other hand, the Indian market itself has turned more volatile than expected over the past few months. These two parameters have to work together again to make the IDBI Bank divestment feasible," said a veteran investment banker at a large Indian advisory firm.
The government has been making several attempts to monetize its stake in IDBI Bank over the past few years. Between 2016 and 2018, the government held discussions with several local and foreign banks for a potential merger with IDBI Bank, but the talks failed. This forced the government to bring in LIC as a white knight to take a majority stake in IDBI Bank and become a co-promoter of the lender along with the government.