Monday, November 26, 2012

LIC needs to have a policy for itself

November 26, 2012

Is the government taking Life Insurance Corporation of India's (LIC) motto, Yogakshemam Vahamyaham, too seriously? The phrase attributed to Lord Krishna in the Gita, roughly translates as "I will ensure universal well-being"; apt, one should say, for a company that insures lives. But can it be extended to mean that LIC also insures government finances?

Last week the government allowed the insurance major to invest in a company up to 30 per cent of the latter's paid-up capital ; up from the current limit of 10 per cent. Never mind that the regulator for the sector, Insurance Regulatory and Development Authority (IRDA), has not been willing to concede this long-standing demand of LIC for various prudent reasons.

Connect the dots

Those following the government's fiscal predicament and its disinvestment plans were quick to make the connection. The rule was being eased to allow the government to dip into LIC's large coffers while offloading PSU shares through disinvestment. For the current fiscal alone, LIC has an investment target of Rs.2.4 lakh crore, 10-15 per cent of which will be in equities. In the first six months of 2012-13, LIC has already invested about Rs.8,000 crore in stocks, according to its CMD, D. K. Mehrotra.

Forbidden fruit

Now, how could the government, which owns LIC, possibly resist the temptation of tapping into such a large corpus especially when it is desperate to sew up the expanding fiscal hole?

The Hindustan Copper disinvestment on Friday proved the theory right. LIC and a couple of banks reportedly had to rescue the Hindustan Copper disinvestment which attracted poor bids till the last 15 minutes before the sale closed. That's when the knights in shining armour descended on the scene to save the government's face.

If true, this would not be the first occasion when LIC was called in to rescue a PSU share sale. In March this year, the ONGC disinvestment, on which were riding big hopes for the government, floundered and it was LIC that bailed it out. The insurance major contributed Rs.11,500 crore of the total of Rs.12,767 crore raised from the ONGC share sale.

The interesting part here is that LIC is now in the red by close to Rs.2,000 crore from the investment. It bought the shares at Rs.303.67 apiece; the current market price is Rs.251. This is probably the most infamous of all the occasions when a government-owned financial institution was forced to bail out its owner. LIC also played a prominent role in the recapitalisation of banks when they issued shares to keep abreast of capital adequacy norms of the RBI.

On the same day last week when the government announced a relaxation in single-company investment norms, LIC was involved in yet another bailout, that of Air India. The company was investing Rs 3,000 crore along with the Employees Provident Fund Organisation (EPFO, which was investing Rs.4,500 crore) in Air India's bond issue. How can LIC, or for that matter the EPFO, justify investing such a large sum in a troubled airline with a doubtful future?

Pulling the strings

This expedient practice of using financial institutions to raise resources is dangerous as can be seen from the erosion that LIC has suffered from its investment in ONGC.

Of course, it is quite possible that the ONGC share will reverse its trend and appreciate from now. It is also possible that LIC will profit from this investment in the future. But the question is whether LIC would have invested in ONGC on its own? Would its fund managers have seen value in the investment?

In the latest case of Hindustan Copper too, investors shied away from the offer for sale because the offer price of Rs.155 a share was seen as high in relation to the fundamentals of the company.

Remember that LIC and other financial institutions have now bought at this price which may fall when the new shares are listed. Who will then make good the loss that the institutions suffered?

With the government desperate to raise the targeted Rs.30,000 crore from disinvestment this fiscal, there is likely to be more pressure as other PSUs are put on the block for sale.

The financial institutions should take an independent call on investing in the disinvestment programme, which is probably easy to say given that the government owns them.

The road not taken

The government should also rework its strategy as raising resources cannot be the only purpose of disinvestment. Giving retail investors the choice to participate in the wealth creation by PSUs should also be a major objective, which in turn will also pep up the markets. To do this, it has to tailor the share sale programme to attract retail investors.

This means choosing the right companies to sell. It also means fixing the right price at which to sell and offering the right number of shares.

Fixing unrealistic prices for its shares and later leaning on financial institutions to bail it out is not exactly a strategy that will help the government in the long run.
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