Government's IDBI Bank Privatization Fails Again, Raising Doubts Over Disinvestment Strategy
In a significant setback for India's economic reforms, the government has failed to privatize IDBI Bank after ten years and two separate attempts. This perpetual problem child in the banking sector has left potential bidders fatigued and raised serious questions over the privatization process as well as the future of disinvestment plans under the Modi administration.
A History of Failed Attempts and Internal Resistance
This was not the first time the Centre tried to exit IDBI Bank. The plan was initially announced by former finance minister Arun Jaitley in 2016 but was scuttled by civil servants and bank executives. They cited possible controversy over real estate assets, including some apartments in South Mumbai and other parts, which created early obstacles.
Five years later, the Modi government again cleared the privatization plan. IDBI Bank emerged as the only privatization initiative that kept moving forward while others failed due to departmental blockages. When the process began, the bank's shares were trading at Rs 31, with four major players in the fray: Oaktree Capital, Kotak Mahindra Bank, Emirates NBD, and Fairfax.
The Prolonged Due Diligence and Bidder Dropouts
Over the next four years, these potential buyers continued with due diligence as the process went through multiple twists and turns. Oaktree Capital was the first to drop out, setting a pattern that would continue. The bank clearly offered a good opportunity for overseas players to enter the rapidly growing Indian market, and some were willing to accept indemnities for past litigations, including potential $1 billion outstanding tax claims.
Some bidders were also willing to overlook other challenges such as reservation policies and restrictions on reworking staff-related policies for two years. However, there were going to be significant challenges related to employee culture that could not be easily resolved.
Valuation Discrepancies and Premium Pricing
Those familiar with the sale process revealed that bidders and transaction advisors estimated the book value of shares at around Rs 55-60, against the reported book value of Rs 67. This discrepancy prompted Kotak Mahindra Bank to back out of the bidding process. The reserve price was ultimately fixed at over Rs 94 per share, representing a 41% premium to the book value.
Regarding the bids by Fairfax and Emirates NBD, which were both rejected, one was said to be at a 10% discount to the current book value, while the other was at a 10-12% premium. This created a complex situation for the committee of secretaries tasked with evaluating the offers.
Market Volatility and Share Price Manipulation Concerns
What complicated matters further was the market price of IDBI shares, which soared 59% from under Rs 73 a year ago to over Rs 116 on February 27. With only a 5.3% public float, it did not take significant trading volumes for the share price to move up or down. Market players raised the price in anticipation of the sale, creating artificial inflation.
Not surprisingly, since last Friday the bank's shares have fallen nearly 19% to less than Rs 75, the closing price on BSE on Wednesday. This volatility has raised concerns about market manipulation during the privatization process.
Broader Implications for Disinvestment Strategy
Bankers are increasingly worried about the impact that the IDBI Bank transaction failure will have on other disinvestment deals. Companies typically do not invest five years on a single transaction and would instead opt for smaller private players and ramp up operations during this period. "It's a missed opportunity, not just for the government, but also for LIC, which was brought in to warehouse the shares and is now stuck with it for a few more years," said a banker familiar with the situation.
Besides the Air India sale, the Narendra Modi government has not moved forward on strategic sales, despite its stated policy of exiting public sector undertakings in non-strategic sectors. This failure raises questions about the government's ability to execute its disinvestment agenda and could deter future investors from participating in similar processes.
The IDBI Bank privatization saga highlights the challenges of reforming India's public sector banking system and suggests that more transparent and efficient processes will be needed for future disinvestment initiatives to succeed.
