IDBI Bank Stake Sale: Government cites 2018 court ruling to defend disinvestment

The government on Saturday, October 17, reiterated that it has the legal authority to dilute or divest its shareholding in IDBI Bank, citing a 2018 Delhi High Court ruling that held there was no provision in the law preventing it from reducing its stake in the lender.

In a clarification issued by the Press Information Bureau (PIB), the government said an amendment seeking to restrict dilution of its stake was proposed during parliamentary discussions on the IDBI (Repeal) Act, 2003, but was rejected and did not form part of the enacted legislation.

The clarification comes after the Cabinet Committee on Economic Affairs (CCEA) approved the strategic sale of a 60.72% stake in IDBI Bank to Canada's Fairfax Financial Holdings for ₹52,878.08 crore on Wednesday.

The transaction comprises the government's 30.48% stake and Life Insurance Corporation of India's (LIC) 30.24% holding.

What the Delhi High Court said

The government cited the Delhi High Court's December 17, 2018, judgment in All India IDBI Officers' Association v. Union of India & Others, which dismissed a petition challenging the dilution of the government's shareholding.

The court held that statements made during parliamentary debates could not override the legislation ultimately enacted by Parliament. It also ruled that the doctrine of promissory estoppel could not be invoked to prevent the government from reducing or divesting its stake in IDBI Bank.

“There is no ambiguity in the language of the IDBI Repeal Act, 2003 and there is no scope to read any provision into the said enactment which proscribes the Government from reducing or divesting its stake in IDBI Ltd,” the court said.

The doctrine of promissory estoppel generally prevents a party from going back on a promise when another party has relied on it to their detriment. The court, however, held that statements made during parliamentary debates did not amount to a representation that could restrict the government's ability to dilute its stake.

Government cites earlier Budget announcements

The PIB also pointed to successive Union Budget speeches that outlined the government's policy on transforming IDBI Bank and reducing its ownership.

In the 2016-17 Budget, then Finance Minister Arun Jaitley said the government would take forward the bank's transformation and consider reducing its stake to below 50%.

In the 2021-22 Budget, Finance Minister Nirmala Sitharaman listed IDBI Bank among the entities targeted for strategic disinvestment and said legislative amendments would be required for the proposed privatisation of public sector banks and a general insurance company.

The government said the legislative history, the High Court's ruling and successive Budget announcements collectively demonstrate the evolution of its policy towards IDBI Bank's strategic disinvestment.

Fairfax deal to transfer management control

Under the approved transaction, the government will retain a 15% stake in IDBI Bank, while LIC will hold 19%, taking their combined ownership to 34%. However, neither the government nor LIC will have board representation after the transaction, according to the approved restructuring framework.

Fairfax's winning bid of ₹81 per share was above the independently determined benchmark valuation of ₹75.99 per share. The transaction is set to become India's largest foreign direct investment deal in the financial services sector.

The restructuring framework also envisages a resolution of Fairfax's existing holding of around 40% in CSB Bank, with a merger with IDBI Bank or an exit from CSB Bank being the routes under consideration, in view of Reserve Bank of India norms on promoter ownership in multiple banks.

The government has also empowered the Alternative Mechanism to undertake future minority stake sales of its residual holding through the open market, while LIC will manage its remaining stake in accordance with regulatory requirements.