Abizer Diwanji, Founder, NeoStrat Advisors LLP, said the key issue appears to be valuation. He noted that while deal structure challenges are known, the gap between expected and offered prices may be the main hurdle. Comparable deals in the sector have taken place at lower price-to-book multiples, while IDBI Bank’s valuation expectations remain higher.
The divestment process now hinges on aligning price expectations and simplifying the transaction structure to attract buyers.
According to Harsh Vardhan, a former partner at Bain & Co, the IDBI transaction is large, with a potential size of over ₹40,000 crore, making both buyers and sellers cautious. He said buyers typically seek safeguards such as clear terms on liabilities and future risks.
Watch the full conversation here
Former RBI Deputy Governor SS Mundra said the deal structure adds complexity. The government and Life Insurance Corporation of India together hold over 90% stake and plan to sell 60.7%. Both stakeholders have different priorities, including fiscal goals and returns to policyholders.
These are edited excerpts of the interview.
Q: What accounts for this failure of the government to close the deal when private players are doing so well and getting buyers easily?
Harsh Vardhan: You have to keep the broader context in mind. This is the first time the government is trying to sell a very large financial sector entity. It has never happened before. So there is no experience in the government to go by. IDBI is an over ₹80,000 crore market cap company. So, if we have to sell even 50%, this is a ₹40,000 crore-plus transaction.
This is a very large transaction. And so obviously, both sides, the buyer and the seller, would be extremely careful in a transaction like this. Even in the private sector, when such large transactions happen, your investment banking friends will tell you that a lot of energy and mind space is spent on something called representations and warranties and indebtedness, where the buyer essentially protects the seller from any unforeseen eventualities that might arise post the sale.
So, my sense is, and this is entirely based on public domain information—I have no private information—that, given that there has been a dramatic turnaround in the performance of public sector banks, the government’s valuation expectations may have gone up. That’s where your comment about the reserve price not being met would be coming from.
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And secondly, any private sector buyer or investor who is going to deploy so much capital would expect an unconstrained transfer of management control, and that in a government entity could always pose a challenge. There could be employment contracts, and there could be other sorts of constraints on the way the bank will be managed post-acquisition. So, my guess is those are the two main areas which could hold the government back from pursuing the transaction, just based on public information.
Q: You have seen all formats, private and public sector, as well as made policy. What is your sense? I personally thought the government got everything right. First of all, it is under the Companies Act. IDBI, unlike the other PSU banks, is not under the Banking Companies Act, which is a more difficult act where the government appoints the CEO. In IDBI Bank, because it’s under the Companies Act, the NRC and the board appoint the CEO. So, it looked clean as well. Axis Bank was under LIC, and it was very easy to treat it as a private sector bank. So that is why they did this LIC routing. This seemed to have done everything right. Why do you think it’s flopping so badly and taking so much time?
SS Mundra: First, you mentioned that private banks are in a position to sell easily, and why we are facing so much difficulty here. Let’s understand one thing. In most of those cases, the investors have chosen to pick up a strategic stake, not necessarily majority control. And basically, you have to look at the transaction from four or five broad criteria. One is the transaction structure. Another is the regulatory framework, which is likely to come. What is the valuation expectation? What about governance and any legacy concerns? And finally, the bureaucratic framework.
If we look at it, I would initially touch upon two things. Number one, transaction structure. In the case of IDBI Bank, it is a very complex transaction structure, in the sense that the government is holding something like 45.5%, and LIC is holding 49.2%. Put together, they want to divest 60.7%, and both owners would have their own expectations. The government would have policy issues and fiscal targets. LIC has to think about returns to policyholders’ interests and return on investment, more so now that it is listed.
So I think in this complexity, an investor would probably prefer a very clear, clean transaction, where structural complexities are minimal. It should be driven by market valuation and a simpler regulatory framework.
As Harsh Vardhan also mentioned, what we understand is that probably the mismatch has come in valuation expectations. So, I think the requirement would be to put a simpler transaction structure, maybe sequencing the divestment by both the owners, and be prepared to accept market valuation, because the market valuation would depend on asset quality, future growth possibilities, and how complex integration would be. So, these are the kinds of things which would determine pricing.
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I know both things are difficult, but I think they are imperative. They would need to be done.
Q: As you spoke, we are playing out the ROA of the three banks—RBL, Yes Bank and IDBI Bank—and IDBI has a higher ROA. But both those banks went for around 1.1 times price to book, and Yes Bank at 1.4x. In IDBI’s case, if you take a book value of about ₹55–60 as of December, it was trading at ₹100. The market price was asking for something like 1.8x. Do you think it was the market price which spoiled the whole thing? What, according to you, is going wrong here?
Abizer Diwanji: I personally think, assuming it is spoiled—because we don’t have the government’s answer yet—that the larger issue is only about price. While SS Mundra and Harsh talked about complexity, that complexity was known. Every bidder knew what they were getting into.
They were getting into a more or less pari passu stake with the government plus LIC, with voting power. The multiples were known. I think the real issue is around price and how it has moved up.
A deal at around ₹70 would have been very doable, because it would have been comparable with valuations of, say, Yes Bank or RBL Bank. So, I think it’s primarily a valuation issue, not really a deal structure or complexity issue.
