Why govt may tweak norms for planned IDBI Bank stake sale

The Indian government wants to make sweeter the deal it is offering for the divestment in IDBI Bank. 

News reports say that the government is likely to waive some tax norms for the buyer of IDBI Bank in a bid to attract more suitors for a majority stake sale in the lender.

This, after the central government extended the deadline for initial bids. 

So, what is the government likely to do?

According to a news report, the finance ministry is looking to relax a tax clause, which would require the buyer of IDBI Bank to pay additional tax if the share price rises post the final bid. 

How does the process of bidding impact the dynamics of a company’s stock price?

Share prices tend to increase after financial bids are invited by the government. According to the report, government officials think it would be "unfair" to ask the new buyer to pay tax on an increase in price from the time bids are placed to the closure of transaction.

In case the share prices of IDBI Bank increase after financial bids are formally placed, the difference in share price may be considered as "other income" for the buyer as per tax laws, experts cited by several news reports said.

The government's planned tax waiver will allow a potential buyer to avoid this levy.

Who are the owners of IDBI Bank?

The government and state-run Life Insurance Corp. (LIC) together hold about 95% in IDBI Bank, and have sought initial bids from investors to buy a 60.72% in the bank. 

What are the new government deadlines for receiving bids?

Last week, it extended the deadline for submitting initial bids until Jan. 7.

Once the government receives initial bids expressing interest from buyers, the Reserve Bank of India would vet them to see if they meet the central bank's "fit and proper" criteria.