Why Fairfax's IDBI Bank deal raises questions over valuation, voting rights and RBI rules

Fairfax Financial's acquisition of a majority stake in IDBI Bank has brought a long-running privatisation process closer to completion. But the deal has also raised questions about the bank's valuation, the extent of the new investor's control and whether India's banking rules treat foreign investors and domestic promoters consistently.

The Cabinet Committee on Economic Affairs (CCEA) approved the strategic restructuring on Wednesday, October 14, in a transaction valued at over ₹52,878 crore. Fairfax has been selected as the winning bidder and will acquire shares at ₹81 apiece. The government and

Life Insurance Corporation of India (LIC) will retain stakes in the bank.

Speaking to CNBC-TV18, Amit Tandon, Founder and Managing Director of IiAS, and JN Gupta, former Executive Director of SEBI, discussed the factors behind the valuation, the limits on Fairfax's voting rights and the regulatory issues that remain.

Why is Fairfax acquiring IDBI Bank at ₹81 per share?

The acquisition price is below the bank's market closing price and the initial reserve price of ₹94 per share. Tandon said the valuation needs to be considered in the context of IDBI Bank's underlying assets and the structure of the transaction.

He pointed to uncertainty over the quality of the bank's assets as one factor that could have influenced the bid. He also referred to a valuation report indicating a fair value of around ₹76 per share, suggesting that this could help explain the price.

Another factor is the restriction on voting rights. Fairfax is acquiring 60% of IDBI Bank's equity, but its voting rights will be capped at 26%. Its economic ownership will therefore be substantially higher than its permitted voting power.

“The current market price does not take into account the cap on voting rights,” Tandon said.

The prospect of LIC selling additional shares could also weigh on the valuation. Tandon said the expected sale could create a market overhang, as investors account for the additional supply of shares.

How much control will Fairfax have over IDBI Bank?

The government will retain a 15% stake in IDBI Bank, while LIC will hold 19%, giving them a combined shareholding of 34% under the approved structure.

Gupta said LIC had committed to selling another 5% to 6% of its stake. He also pointed out that the government and LIC, through their continuing shareholding, could block a special resolution if they retained more than 25% collectively.

This means Fairfax's majority ownership will not necessarily give it an unchallenged position on every decision requiring a special resolution. Gupta suggested that a roadmap would have been agreed upon with the government and LIC to address how the bank would be managed and restructured.

The eventual balance of influence will depend on the agreed arrangements and the stakes held by the government, LIC and Fairfax as the restructuring progresses.

Why has the RBI's approach to bank ownership come under scrutiny?

Gupta questioned why different ownership limits appear to apply to foreign investors and Indian bank promoters.

He cited the RBL Bank transaction, in which the Reserve Bank of India permitted a foreign party to hold more than 70%, compared with the 60% stake permitted in the IDBI Bank transaction. He contrasted this with the requirements historically imposed on promoters of private banks to reduce their shareholding to below 15%.

“When a new investor comes in, do you have more faith in their capabilities or governance standards, whereas an existing promoter who has been operating for a long time with good governance is still required to reduce their stake?” Gupta asked.

He argued that the difference in treatment had not been adequately explained and called on the RBI to review its policies and adopt a uniform approach. In his view, the rules should be consistent, particularly when India wants to attract foreign investment.

His criticism was directed at the regulatory framework rather than the IDBI Bank transaction itself, which he welcomed after years of delays.

Will IDBI Bank need further capital support?

Tandon said the need for further government capital would depend on how the bank performs under its new ownership. The expectation is that Fairfax will bring expertise, knowledge and underwriting skills to improve the bank's management.

“At this stage, the government is not expected to be called upon to step in with further capital,” Tandon said.

However, he noted that the bank's performance and the effects of the restructuring would need to be assessed as more details emerged.

What other issues remain after the deal?

The proposed restructuring raises questions beyond the transfer of the IDBI Bank stake.

Under the approved roadmap, CSB Bank, in which Fairfax owns around 40%, is to be merged with IDBI Bank within two years. Tandon said more clarity was needed on the roadmap for CSB Bank, including whether it would be merged or sold in the market.

He also raised concerns about the group's interests in the mutual fund business. According to Tandon, Fairfax's group has a direct or indirect stake in Quantum Mutual Fund and would also own IDBI Mutual Fund following the transaction. He questioned how these interests would be separated in light of the regulatory requirements he cited.

Further details will be needed to establish how these issues will be addressed as the restructuring proceeds.

What will determine the success of the IDBI Bank deal?

The transaction marks a significant step towards completing IDBI Bank's long-running privatisation process. Gupta welcomed the development, noting that efforts to privatise the lender had continued for almost a decade.

The next test will be whether Fairfax can improve the bank's performance while operating within the voting-rights structure and resolving the outstanding questions around the proposed restructuring. Gupta's call for a more uniform approach to bank ownership rules also leaves a broader policy question for the RBI.