This may require amendments to the tax laws as there is no provision for adjusting carried forward losses against profit when the entities involved in a merger are private parties.
IDBI Bank is 95% owned by Life Insurance Corp of India (LIC) and the government, but the Reserve Bank of India (RBI) has classified it as a private lender.
A senior official said the government is open to making amendments to the Income Tax Act to facilitate the bank’s privatisation. The government had provided a similar dispensation for public sector bank consolidation in April 2020, allowing the set-off of accumulated losses and unabsorbed depreciation after mergers that reduced the number of state-owned lenders to 12 from 21.
“The government is inclined to provide the requisite dispensation so as to facilitate the stake sale,” the official said. “The contours of any exemptions will be decided after consultation with all stakeholders.”
IDBI Bank is also seeking approval to set off accumulated losses worth ₹45,586 crore against the balance in the securities premium account.
Accounting Adjustment
The scheme, which is pending before the National Company Law Tribunal (NCLT), is an accounting adjustment that will allow the bank to pay dividends and has no bearing on the privatisation.
“The losses will remain on the books and could be potentially carried forward in the event of an amalgamation provided the relevant amendment is made in the Income Tax Act,” said Girish Vanvari, founder, Transaction Square, a national mergers advisory firm.
Another official pointed out that in order to facilitate strategic disinvestment, the Finance Act, 2021, had amended section 72A of the Income-tax Act to allow tax benefits for accumulated losses in the case of an amalgamation of a public sector company that ceases to be one after the stake sale. Accumulated losses and the unabsorbed depreciation of the PSU will flow to the amalgamated company for the preceding year. “A similar dispensation can be provided in the case of IDBI Bank,” the official said.
In October, the government invited expressions of interest (EoIs) for a majority stake in IDBI Bank along with transfer of management control.
The government, along with LIC, will sell a 60.72% stake in the lender. The last date for EoI submissions has been extended to January 7.
IDBI Bank ended 3.8% down on the BSE Wednesday, a sharper decline than the 1% fall in the Sensex. The bank is valued at ₹57,848 crore at this price.