Regardless, the decks have been cleared for the proposal to be implemented. Being a departmental decision, it does not require Parliament’s approval. The DoP has already drawn up a detailed set of parameters which will decide the selection of an asset management company (AMC) through a two-stage open tender process. For the moment, the bids will be open only to Indian AMCs.
The move to tap the stockmarket for better returns comes as a follow-up to an ambitious plan unveiled last year by Union minister for communication Dayanidhi Maran to "corporatise postal services" and ensure that the Rs 1,400-crore deficit in the postal budget is plugged. But will handing over insurance monies to a mutual funds company prove to be a masterstroke, a windfall for the nearly 70 lakh policyholders in India’s small towns and villages, or will it be a fiscal disaster in the making?
According to DoP officials, the move will usher in a much-needed professional impetus that could turn the scheme into a high-yielding mutual fund. However, being linked to markets, it could prove to be a high-risk option for conservative small investors who have put in their life’s savings in a scheme originally meant to be a welfare-oriented one for government servants and the middle-class and lower middle-class urban and rural populace. While the PLI has been around for nearly 120 years, the RPLI was set up only in 1995 on the recommendations of the official committee for reforms in the insurance sector. The committee noted that in 1993 only 23 per cent of the "insurable population" had insurance. It also noted that life insurance funds accounted for a mere 10 per cent of household savings. This led to the post-masters in rural areas to double up as insurance agents as the RPLI took root and registered phenomenal growth.
What will the new proposal mean to policyholders? The government will guarantee that the assured sum is paid to the insurer. Therefore, if a policy is for Rs 2 lakh for a 20-year period, the sum will be returned at the end of the term. But the fixed 8 per cent bonus which the government currently pays annually will now be linked to returns from the stockmarket. It could well go up if the fund managers back the right shares. On the flip side, it could go down should the markets crash.
A report prepared by consultancy firm A.F. Ferguson & Company (and accessed by Outlook) on the proposed handing over of the fund notes that the Directorate of Postal Life Insurance will appoint "one or more asset management companies to invest and manage the PLI and RPLI funds available with it". While officials are busy applying the final touches to the proposal, V.P. Pati, additional general manager (Directorate of PLI), told Outlook that "this will ensure that the fund is handled by professionals who understand the market". While the AMC manages the fund, Pati is also looking forward to the "corporatisation of the directorate as his staff is trained to take up the new investment challenges"...The other key parameters to be factored in while selecting an AMC are:
- It must have approvals from SEBI and other regulatory agencies.
- Its net worth and profitability will be crucial. It must have a track record of "continuous net profit after tax" for the last three years.
- It must have a net worth of "not less than Rs 25 crore". It must have at least Rs 1,000 crore as "funds under management".
Opposition is also building up from unions in DoP itself. "The postal insurance scheme was meant as a welfare measure for people who would not be covered by similar schemes earlier," says C.C. Pillai, secretary general of the National Federation of Postal Employees. He points out that the move, ostensibly aimed at reducing the DoP’s Rs 1,400-crore budget deficit, is actually based on erroneous calculations. "Our gross working expenditure is Rs 5,736 crore while our earnings are Rs 4,256 crore, but all our pensions are taken from this working capital unlike other government departments which draw their funds from the Consolidated Fund of India," contends Pillai.
He also points to an issue that is likely to cause much heart-burn for subscribers. So far the entire fund and its annual accretions were part of the Special Deposit Scheme which was at the disposal of the finance ministry. Now the ministry has decided to hand this over to the Directorate of PLI and instructed that all investments be made as per the guidelines issued by the Insurance Regulatory and Development Authority (IRDA) for which it must appoint a private AMC. Which, according to Pillai, could lead to the interests rates falling below the guaranteed 8 per cent that the ministry was paying and that future rates would be decided by the performance of the fund’s investments. However, Pati counters this by saying that while insurance schemes were welfare-oriented earlier, they now require "corporate management in a highly competitive environment".
Meanwhile, industry put in a welcome cheer for the proposal. Says Nilesh Shah, CIO, Prudential ICICI, "Competition and professionalism are always desired, and this is a welcome step. If the government is offering this fund to be managed by an AMC through an open tender process, then this is indeed a very positive step." Sandesh Kikire, CEO, Kotak Mutual funds added a caveat. He pointed out that the success of the scheme will lie in the benchmarks the government sets. "It is an interesting proposal, but the portfolio characteristics have to be clear and the performance of the fund will hinge on that."
A good thing to ask then: is subjecting public money to the ups and downs of the stockmarket worth the gamble? Or will future postal insurance schemes come with the rider—mutual funds are subject to market risks, please read the offer document carefully....
