Fairfax May Use IDBI Bank’s Excess Capital To Help Fund ₹52,878 Crore Buyout

Mumbai: Fairfax Financial Holdings would be using IDBI Bank’s excess capital to partially finance its proposed acquisition of the lender according to the full transcript of Fairfax's investor conference call on October 15. The proposed deal raises governance and valuation issues, pointed banking and market experts.

According to the transcript, company executives of Fairfax said that IDBI Bank could use its surplus capital to buy Fairfax's holdings in Go Digit General Insurance, Go Digit Life Insurance and IIFL Capital. The proceeds, around Rs 28,000 crore could then become part of Fairfax's funding plan for the IDBI stake purchase raising the question that ‘Is Fairfax buying IDBI Bank using the lender’s own money?

Says JN Gupta, former executive director Sebi, “Had IDBI Bank purchased an insurance or a broking company independantly, it would not have been an issue. But here IDBI Bank is buying Fairfax’s assets and these transactions are linked to its own stake sale. So there are bound to be questions raised on governance and valuation issues.”

Says Ashvin Parekh, managing director, Ashvin Parekh advisory services LLP, “This is an interesting deal. It is raising issues on governance, minority shareholder rights and regulatory approvals and of course there will be a need to explain this arrangement to all the shareholders and explain why so much of leveraging of IDBI balance sheet is being carried out?”

Bankers also pointed out that unlike other mergers and acquisitions in the banking sector such as the UAE based Emirates NBD acquiring a stake in RBL Bank or Japanese banking giant Sumitomo Mitsui Banking acquiring a stake in Yes Bank, the domestic lenders got money. However, here, IDBI Bank will not receive any money. The money will go only to the government and LIC which is a misuse of IDBI Bank balance sheet.

Said another industry expert, “The deal arrangement does not give the right optics. A bank’s excess capital is to be used for lending purposes or to preserve it for its future growth. Why is IDBI Bank using the excess capital for buying assets of Fairfax? There is no justification. Secondly, if insurance and brokerage are the areas that have been identified by IDBI Bank then why did IDBI Bank exit from IDBI Federal Life Insurance in the first place?”

As per a Businessworld report, during the call, an analyst from Raymond James posed a question: How did Fairfax intend to bring its insurance subsidiary, Go Digit, under IDBI? Would IDBI use its surplus cash to acquire the shares at market price?

Fairfax chairman and founder Prem Watsa told analysts that IDBI Bank could pay for the businesses in cash. Responding to a Raymond James analyst on the proposed Go Digit transfer, he said that there was excess capital at the bank and that it would pay cash "at market prices" at the time of the deal.

Watsa earlier listed Fairfax's funding sources for the acquisition: cash in hand, dividends from its insurance businesses, possible asset sales, and contributions from Go Digit and IIFL Capital at their market prices.

Fairfax president Peter Clarke put the acquisition's cost at $5.6 billion. He said the contribution from Digit Insurance, including its life arm, and IIFL Capital could be worth about $3 billion, or over half the cost. According to BW Businessworld calculations, this come at approximately Rs 28,300 crore at the exchange rate implied by the deal price.

The Cabinet has approved Fairfax’s buying of 60.72 percent of IDBI Bank from the government and LIC for Rs 52,878 crore, at Rs 81 a share which is below the market price on the day of the Cabinet decision. IDBI Bank has a networth of Rs 61,164 crore on September 30.