Getting LIC to invest more in PSUs will protect government wealth
Nov 22 2012, 2022
In tapping into Life Insurance Corporation’s investible corpus, the government has made an informed choice. The proposal seeks to enhance the cap in holding of LIC in a single firm from 10 per cent to 30 per cent. LIC has an investible corpus of over Rs 2.25 lakh crore, and its limit for investment in equities is Rs 45,000 crore this year alone. Given that, the government’s proposal, in a way, appears intended to pre-empt investor cartels that have subverted the price discovery mechanism through manipulation of market prices. In the past, short selling in PSUs has been witnessed on the eve of share sale. The purpose in such market manipulation was to acquire the shares at the lowest possible value and subsequently book supernormal profits in selling the same. This is a fundamental flaw in market valuations. Ideally, reserve prices of PSU shares need to be fixed on the basis of discounting future earnings or on the basis of intrinsic values. That applies even to PSUs that are incurring losses at present. So, getting LIC to invest in PSUs may be a wise move on part of the government, which, as majority shareholder must protect its wealth. Of course, there will be howls of protest from private sector investors, foreign institutional investors and criticism from battalions of analysts, who will offer specious arguments that there was no level-playing field or policyholder funds were diverted to government coffers. Yet, such arguments hold little substance. This is because private investor interests of just profit to shareholders alone do not determine LIC’s valuations. In the case of LIC, interest of policyholders is paramount. On the second argument, unlike in the case of private sector investors or foreign investors, profits from PSU equity trading will ultimately accrue to the government by way of dividends because, after all, the government owns LIC. Finally, LIC holding in PSU equity also does not mean outright privatisation of public assets. It just means financial institutions get a greater presence in the managements of PSUs. Yet, raising the LIC cap alone will not do. The proposal would have to be followed up with other administrative actions. One such action that would be immediately required would be to make amendments to the Securities Exchange Board of India’s substantial acquisition of Shares and Takeover’s Regulations, specifically clauses 7 and 10 of the regulations that prescribe public disclosure of over 5 per cent stake holding and open offer beyond 15 per cent of the stake holding. Those issues would need to be urgently addressed if the government is to achieve the disinvestments targets this year. But, the question is why exclude other insurance companies, particularly the four public sector non-life insurance companies, the national reinsurer and the Agricultural Insurance Corporation? Are they also not government-owned financial institutions? Similarly, public sector banks are permitted to invest up to 5 per cent of incremental deposits in equities and debentures. It is precisely because of single entity exposure caps that they have also been unable to enhance their stakes in public sector enterprises. If the LIC investment cap exemption is applied to these institutions, the investment corpus available substantially increases. That could more than take care of the government’s divestment targets for this year and the next year. Private sector and foreign institutional investors can either fall in line or take the highway.