As millions of Indians know well, the Life Insurance Corporation (LIC) is in the business of insuring lives and, for most, generating safe returns. But of late, it’s also being viewed as a last-resort bailout for the government’s disinvestment programme. Which has raised a disturbing question: can the government’s plans to allow LIC to invest up to 30 per cent in any single listed or unlisted entity end up putting the state-owned behemoth at risk? Industry experts and the insurance regulator agree that the notification, expected soon, will expose LIC to a greater amount of concentrated risk.
That should worry millions of policyholders. The finance ministry’s decision, in fact, goes against every recommendation that the insurance regulator has made. The IRDA has vehemently opposed the government’s decision on LIC, only to finally lose the battle. The government pushed this decision to the extent that it asked the Union law ministry to clarify which law stands—the Insurance Act of 1999 or the LIC Act of 1956. “IRDA is of the view that it has complete oversight over the LIC with regard to both market conduct and prudential regulations,” a miffed regulator noted at a recent RBI meet.
“The government may be legally correct but there is no logical reason for there to be a difference between the caps for LIC and other insurers,” says former Pension Regulator and current chairman, fpsb India, D. Swarup. “Increasing the exposure and risk like this makes no sense.” As things stand, insurance firms can invest only up to 10 per cent in any single listed or unlisted entity—a limit set by IRDA to curb risk.
LIC has pumped in approximately Rs 13,000 crore into disinvestments since 2012. This has recently included the disinvestments of ONGC, NTPC, NMDC—these cases alone have caused mark-to-market losses of over Rs 5,000 crore. Then there’s the Rs 8,000 crore invested in the preferential allotments of Bank of Baroda, Punjab National Bank and so on.
Given that LIC already owns over 10 per cent in at least 78 companies (thanks to its sleight of hand in treating investments from LIC’s various funds separately), the concerns are justified. Many industry observers strongly feel the finance ministry’s stand on the issue jeopardises LIC stability and policyholder funds.
When contacted, this is what a senior LIC official had to say: “We make long-term investments based on stocks we see potential in. Counting notional losses based on daily price movements doesn’t matter because of our investment strategy.” That’s the official line. But a former top LIC official Outlook spoke to admitted that often the corporation isn’t given a choice in these matters. “The question to ask is whether LIC would have chosen to make those investments on its own. Considering that none of the other diis or fiis showed any interest in these stocks and that LIC had to step in...well, it tells the whole story,” he says.
Of course, the policyholder has no reason to feel worried—the LIC is ‘backed’ by the government. But how will the corporation continue to remain low-risk with this kind of exposure and given the number of policyholders it has?
Market analysts point out that given the kind of exposure LIC has to the Indian capital market, any adverse movement could damage the markets manifold. “Imagine LIC owning a large chunk of a bank or company—if it decides to exit, it puts the company at risk. If LIC has a concentrated risk in a sector, and something goes wrong with the sector, it could substantially erode policyholder returns and so on,” says a leading analyst. To this adds Dhirendra Kumar of ValueResearch, “The government is running out of ideas in order to meet its targets. Diversity is a very basic principle of investments, this move goes against that. Returns will get marginalised further.”
Of course, there are some defenders of the finance ministry’s move. Like ex-LIC chairman S.B. Mathur, who argues that “LIC needs to have headroom to invest in good companies instead of being forced to move down the line to second-rung companies, given the size of investible funds”. Reacting to this view, a life insurance industry veteran says that then private sector insurance companies should also be allowed the same leeway proportionately, even though their investible funds may be smaller.
Then there is the whole issue of regulator autonomy. When the insurance sector was opened, it was decided by the government and policymakers that LIC would come under the purview of the insurance regulator. By forcing the issue through a legal argument, the government has managed to undermine the regulator’s authority, say industry sources. “Every time a conflict brews between a regulator and the finance ministry, there is a question of who prevails. This in itself undermines the idea of independent regulators. IRDA must be allowed to take the decisions for all the players in the sector and they should apply uniformly to all,” says D. Swarup.
It goes without saying that LIC should be allowed to make its own decisions regarding investments. But the finance ministry thinks otherwise. Will LIC be able to get back to the business of insuring lives rather than bailing out the government? For now, that seems a tall order.
Apropos The FM Has An Insurance Policy (Feb 4), in a policy regime where psu shares are forced upon LIC by the government, there should be a moral covenant dictating that something worthwhile will be left for the policyholders. Not what happened to ongc shares some time ago.
Ashok Lal, Mumbai
The uncertain share market is a matter of concern for LIC. It was left unscathed in the global meltdown thanks only to its continued regulation. The Centre, through this legislation, intends deregulation. This may ultimately hurt insurance policyholders.
C. Chandrasekaran, Madurai
The LIC plays an important role in the country’s econo–mic standing too. The government’s decision to take liberties with the LIC’s investment structure has raised many questions. We need to wait and watch to see if the new approach bears fruit.
Xavier Albuquerque, Mumbai
When PSU shares are forced upon LIC by the government, there should be a moral covenant that something worthwhile will be left on the table for the policy holders. Not what happened with ONGC shares some time back.
LIC is a giant mammoth our government has and it is making use of it. LIC has been insuring lives for years now but not to forget it plays as important role in the countries economic standing. The goverment decision to be liberal in the investment structure of LIC has left many to think and to ask question. But not to forget LIC always made long term investment which makes it much stable in its investment approach. Well the amendment will clash with the other subsidiary laws but that is a small issue. I am glad of the changes that has taken place in LIC funding. It new approach needs to be wait and watch to see its fruit.
The author Ms.ArtiSharma has rightly triggered a debate over the pattern of investment in LIC. The vision of Pandit Jawaharlal Nehru, who nationalised Insurance Sector, amalgamating the then 240 private companies booked for mendacity of all sorts, proved right. That the client base of LIC expanded to 35 crores, fourth nation in the world population , bears testimony to its good will and trustworthiness earned all along.LIC is uno-numero in claims settlement internationally, keeping its Indian competitors at bay, who struggle hard to make a dent into its market share. Ever since the smoke of privatisation started sneaking into national economy, say from ninetees,slew of measures like dividing LIC into 5 zones were tried only to beat a retreat due to the protracted struggle of the major trade union, the All India Insurance Employees Association. The signatures of policyholders obtained in crores through out the nation, could halt the move. The NDA government passed IRDAct as the Congress hardly opposed it. Now UPA II intends to raise the cap of FDI to 49% from the present 26%, against the unanimous recommondation the Parliamentary Standing Committee headed by Yashwant Sinha. When LIC could collect FDI of Rs.6600 in five years, the centre's claim for higher FDI appears hollow and unrealistic. LIC is pushed into a different investment climate now. The uncertain share market is sure a matter of concern for LIC which acts as a trust of policyholders committed to meet out their future claims. The returns for the present mandatory LIC investment in PSUs may account less, though otherwise compensated by its security. When all global insurers could hardly escape the tsunami of global melt down, LIC was unscathed thanks to its continued regulations. The centre through the present legislations intends deregulation. This may ultimately speak badly on insurance savings held by Insurance policy holders.
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