The government has urged the Securities and Exchange Board of India (Sebi) to relax the mandatory public shareholding norm for the potential acquirer of IDBI Bank by treating the combined residual stake of the government and LIC after the strategic sale as part of public float. The government is of the view that the dispensation will give the buyer sufficient time to expand business and boost the bank’s valuation before diluting the stake.

LIC, the current promoter, and the government, will together have a residual stake of 34% in IDBI Bank after the transaction. According to the Sebi norms, a company is required to have a minimum public holding of 25% within three years of listing. The market regulator enforces this rule more strictly for non-government companies.

IDBI Bank was listed as early as in 1995. Still, the public holding in the bank is just 5.28%, since it enjoyed a leeway, being majority-owned by LIC and the government.

On October 7, the Centre invited expressions of interest (EoIs) for IDBI Bank and offered to sell a total of 60.72% stake in the bank, including 30.48% held by the government and 30.24% by LIC, along with the transfer of management control. Currently, LIC (49.24%) and the government (45.48%) together hold a 94.72% stake in the lender.

A strategic investor, sources said, may not like to offload stake in the initial three years, a period when it will likely be setting up a new management team, restructuring the business and attempting a rebranding of the banking company.

According to the preliminary information memorandum (PIM) for IDBI Bank EoI, the successful bidder would be required to undertake certain obligations. This includes adhering to the glide path concerning the reduction in its shareholding to meet the minimum public shareholding “following the Sebi regulations irrespective of whether the shares held by the Government of India are reclassified as public shareholding in IDBI Bank”.

The government has structured the stake sale in such a way that the buyer can potentially increase its stake to about 66% by acquiring 5.28% held by the public via open offer. This allows the buyer to dilute 25% stake to meet the Sebi norm if the regulator refuses to count the residual LIC-government stake as part of public float and yet meet the RBI requirement of promoter holding of at least a 40% stake in the first five years of the transaction.

According to Sebi’s takeover regulations, the acquisition of an aggregate of 25% shares in a listed entity would trigger an open offer.

According to the PIM, the buyer would get 15 years to bring down the equity to 26% to comply with norms for private banks. Of course, in the first five years, 40% of the equity capital would be locked in, as per the RBI guidelines.