Fairfax offers plan to resolve IDBI-CSB ownership overlapping

Mumbai: Prem Watsa-backed Fairfax Financial Holdings is understood to have submitted an undertaking to the Reserve Bank of India (RBI), outlining a glidepath to resolve its overlapping ownership of IDBI Bank and CSB Bank, people familiar with the matter said. This was furnished by Fairfax even before the Canadian investor received the government's approval for acquiring IDBI Bank, they said.

A merger of the two lenders is emerging as the most likely option, potentially allowing the Canadian investor to consolidate its banking interests under a single licence, sources said. "The regulator does not permit two-point presence of a large promoter or entity with more than 10% ownership in two banks. While the Banking Regulation Act does not explicitly prohibit such ownership, it is within RBI's regulatory discretion to decide whether such an arrangement can be permitted," said a person familiar with the matter.

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The undertaking, which is believed to have been submitted as part of the regulatory approval process for the acquisition, seeks to address regulatory discomfort with a single promoter group having substantial ownership in two universal banks, said the people cited above. "Fairfax has provided a glidepath to resolve this within two years. A merger of CSB Bank with IDBI appears to be the most viable solution, as it would allow the group to retain both banking franchises while ultimately operating under a single licence," the person said.

Fairfax has a plan for ownership overlap

Fairfax and CSB Bank did not respond to ET’s email until press time. The development comes after the Cabinet Committee on Economic Affairs on Wednesday approved the sale of a 60.72% stake in IDBI Bank to Fairfax for Rs 52,878 crore, marking the largest cross-border acquisition in India’s banking sector. The transaction involves the sale of a 30.48% stake by the government and 30.24% by Life Insurance Corp.

Fairfax already owns about 40% of Kerala-based CSB Bank. The acquisition of IDBI Bank would therefore put the Canadian investor in the unusual position of holding controlling interests in two universal banks, even if temporarily.

While there is no express provision in the Banking Regulation Act, 1949, prohibiting a promoter from owning stakes in two universal banks, Section 12B gives the RBI powers to approve substantial shareholding acquisitions in banking companies.

The RBI’s directions on acquisition and holding of shares or voting rights in banking companies also empower the regulator to examine the suitability of major shareholders, their ownership structures and the potential implications for control and governance. Any acquisition of 5% or more requires prior regulatory approval. Fairfax had earlier explored selling its stake in CSB Bank but did not receive valuations that adequately reflected the capital invested in the lender, ET reported last month.

A merger would instead allow Fairfax to retain CSB Bank’s franchise and integrate it with IDBI Bank’s significantly larger branch network, deposit base and lending operations.

The Canadian investor is also looking to streamline its wider financial services investments in India. ET had earlier reported that Fairfax was exploring the sale of its remaining 13.7% stake in IIFL Finance to partly fund the IDBI Bank acquisition and simplify overlapping lending interests. Fairfax is separately seeking to consolidate its capital markets businesses through IIFL Capital Services, in which it had announced plans to acquire a controlling stake.