Government’s Two Attempts to Divest IDBI Bank Conclude Without Success
Ten years after its initial announcement, the Indian government has once again failed to privatize IDBI Bank, raising concerns among potential bidders and casting doubt on future disinvestment plans. The privatization efforts, which began under former finance minister Arun Jaitley in 2016, faced numerous obstacles, including bureaucratic resistance and issues related to the bank’s real estate assets. Despite renewed attempts by the Modi administration, the process has been fraught with complications, leaving stakeholders questioning the viability of the government’s disinvestment strategy.
Challenges in the Privatization Process
The journey to privatize IDBI Bank has been anything but smooth. The initial plan, proposed by Arun Jaitley in 2016, was derailed by civil servants and bank executives who raised concerns about potential controversies surrounding the bank’s real estate holdings, particularly properties in South Mumbai. Five years later, the Modi government revived the privatization initiative, positioning IDBI Bank as the sole focus of its disinvestment strategy. However, while other privatization efforts stalled due to bureaucratic hurdles, IDBI Bank’s process continued to face significant challenges.
When the privatization process commenced, IDBI Bank’s shares were valued at Rs 31, attracting interest from four potential bidders: Oaktree Capital, Kotak Mahindra Bank, Emirates NBD, and Fairfax. Over the next four years, these bidders engaged in due diligence, navigating a series of twists and turns. Oaktree Capital was the first to withdraw from the bidding process, highlighting the difficulties potential buyers faced in assessing the bank’s value amidst ongoing litigation and regulatory uncertainties.
Valuation Discrepancies and Bid Rejections
As the bidding progressed, discrepancies in the valuation of IDBI Bank’s shares became apparent. Bidders and transaction advisors estimated the book value of the shares to be between Rs 55 and Rs 60, while the government set a reserve price of over Rs 94 per share, representing a 41% premium to the book value. This significant gap prompted Kotak Mahindra Bank to exit the bidding process, as the valuation did not align with their expectations.
The bids submitted by Fairfax and Emirates NBD were also rejected, with one bid coming in at a 10% discount to the current book value and the other at a 10-12% premium. The committee of secretaries faced a complex decision, particularly as IDBI’s market price surged by 59% over the past year, complicating the assessment of the bids. The limited public float of the bank’s shares meant that even small trading volumes could significantly impact share prices, leading to volatility in the market.
Impact on Future Disinvestment Plans
The failure to privatize IDBI Bank has raised concerns among bankers regarding the implications for other disinvestment initiatives. Industry experts suggest that companies are unlikely to invest significant time and resources in lengthy transactions like IDBI’s, preferring instead to pursue smaller private players that can be integrated more swiftly into their operations. This shift in strategy could hinder the government’s broader disinvestment goals, particularly in non-strategic sectors.
Bankers have expressed disappointment over the missed opportunity, not only for the government but also for the Life Insurance Corporation (LIC), which was brought in to manage the bank’s shares. With the privatization process stalled, LIC may find itself holding onto these shares for an extended period, complicating its financial strategy. The Modi administration’s track record on strategic sales has come under scrutiny, as IDBI Bank’s situation reflects broader challenges in the government’s disinvestment agenda, which has seen limited progress outside of Air India.
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