Kotak vs Watsa: The battle for acquiring IDBI Bank intensifies

It’s a two-horse race for IDBI Bank between Kotak Mahindra Bank and Prem Watsa-led Fairfax India Holdings, with both parties willing to pay a premium for acquiring a controlling stake. However, neither wants to merge IDBI Bank with their respective banks at this juncture.

“A reasonable share of the government holding may remain in IDBI Bank for at least 2-3 years post the sale,” said a source explaining why the two bidders want to retain their existing banking entities independent of IDBI Bank.

That said, highly placed sources say both interested investors are willing to shell out the premium expected by the government to acquire a majority stake in the bank.

At around ₹57,000 crore of market capitalisation, IDBI Bank trades at approximately 1.3x 12-months trailing price to book valuation.

On June 5, 2022 businessline had reported on Prem Watsa evincing interest in IDBI Bank, while on February 5 this year, we reported about Kotak’s interest in the bank. Sumitomo Mitsui Financial Group and Emirates NBD are said to be the other bidders.

Seeking exemptions

Kotak has proposed a structure whereby IDBI Bank would be held as its associate, with none of Kotak’s key management executives playing any role in the former.

“The boards of IDBI Bank and Kotak Bank will not have overlaps,” said a person familiar with the matter. Once the government’s stake in IDBI Bank reduces, it may be merged with Kotak Bank. “A glide path of 3-5 years has been sought for the merger,” said the source.

Fairfax has approached the RBI to not consider it as a promoter of IDBI Bank. “Fairfax wants to be seen as a large investor in the bank because it doesn’t want to cede control in CSB Bank or merge the two banks in the near term,” said another senior executive who didn’t want to be identified.

• Also read: Too late, NCLAT tells IDBI Bank

As a deal sweetener, sources said: “Fairfax may extend comfort to the Government of India and Life Insurance Corporation of India (LIC) that IDBI Bank will remain a bancassurance partner for all the existing lines of businesses it has with these entities.”

Emails sent to Kotak Mahindra Bank and Fairfax remained unanswered till press time.

Tough call

The exemptions sought by Kotak and Fairfax are contrary to the current regulations. The extant ownership norms do not permit an investor to hold two banks in the capacity of a promoter.

Fairfax is the promoter of CSB Bank holding a 49.72 per cent stake. Likewise, a bank cannot invest in another bank, though an exception was made in March 2020 when the State Bank of India invested a 49 per cent stake in YES Bank.

• Also read: Govt gets multiple bids for stake sale in IDBI Bank

Tracking the divestment

• DIPAM opened an expression of interest in IDBI Bank on October 7, 2022.
• On January 7, 2023, it announced that it received multiple interest.
• Presently, LIC and government hold 49.24 per cent and 45.48 per cent stake in the bank.
• Post the sale LIC to hold 19.24 per cent and government at 15.48 per cent.
• Data room for due diligence likely to be opened in June.
• DIPAM may call for financial bids by September.