Fairfax has two years to sort its IDBI bank puzzle

Fairfax Financial, a leading candidate to purchase the Canadian government's stake in IDBI Bank, has been granted up to two years to streamline its Indian banking operations, according to two sources familiar with the situation. A significant sale of IDBI Bank's majority stake, owned by the Indian federal government and the Life Insurance Corp of India, is currently in its final stages.

This $5.5 billion transaction represents the largest foreign investment in an Indian bank and holds crucial importance for the government amid the ongoing Middle East conflict and weakened foreign inflows that have affected the rupee.

Reserve Bank of India (RBI) regulations prohibit any single entity from owning and operating two separate banks. Fairfax currently holds approximately 40% of CSB Bank, a smaller lender. The investor is anticipated to be given up to two years to either divest its stake in CSB Bank or merge it with IDBI Bank. A government official, however, cautioned against presuming a two-year window for Fairfax to consolidate its bank holdings.

India has received revised bids from Fairfax and Emirates for the IDBI stake following a reduction in the sale's reserve price. The deal has already cleared a panel of senior bureaucrats and now awaits final approval from a committee of ministers, subject to regulatory clearances from the RBI and the Securities and Exchange Board of India.

Fairfax's India division is exploring two options to comply with RBI regulations: merging CSB Bank with IDBI Bank or selling its entire CSB stake, which is valued at $9 billion. CSB, based in Kerala, has been under Fairfax's control since 2018 when the lender required additional capital to address financial challenges. Merging CSB with IDBI Bank could present complications such as labor union-related issues, while a smaller size may limit the combined entity's impact, according to a Fairfax source.

The discussions are at an early stage, and a definitive decision will be made after negotiations with the government are concluded. Fairfax, through its India Holdings Corporation, has a $3.8 billion presence in India, alongside investments in non-bank lender IIFL Capital and online brokerage firm 5paisa.