Disequilibrium: Good money after bad

Disequilibrium: Good money after bad
Disequilibrium: Good money after bad

Sometimes it makes sense to feed the pigeons to the cats. At least this is the government’s thinking. From a prime privatisation candidate, embattled and rogue IDBI Bank is now being handed over to LIC. A typical status quoist government balance sheet manoeuvre, move things from the left pocket to the right pocket. Confirming and validating my suspicion that the Modi Govt will not sell anything, instead it will keep this bogey on the front burner so that foreign investors continue to delude themselves that reform is underway. I will explain why I am calling IDBI Bank a rogue institution. Its total bad loans as a percentage of advances is a staggering 27.95 per cent, which roughly translates into for every Rs 100 in the bank, Rs 28 are bad and stressed. This is against an industry average of 15.6 per cent in the public sector bank universe. Last financial year, it posted a net loss of Rs 5,663 crore.

So, instead of selling it to someone in the private sector or consolidating it by attaching it to another beleaguered bank, the govt has chosen to hand it over to India’s only surviving financial gargantuan Life Insurance Corporation whose job is to secure the lives of Indians by hawking insurance policies. LIC is also the only heavy hitter in the Indian equity markets. Along with the mutual fund community, it plays a significant role in the domestic capital markets. Now look at the process involved — Insurance regulator  Irdai board allowed LIC to buy out 51 per cent stake in IDBI Bank.  LIC will have to sell it in the future and bring it down to the regulatory requirement of 15 per cent.” This could mean LIC would have to start cutting its stake from 51 per cent in the next few years and bring it on par with norms for other insurers.  Theatre of the absurd.  The Insurance Regulatory and Development Authority (Investment) (Fifth Amendment) Regulations, 2013 allows insurers with assets of over Rs 2.5 lakh crore to buy up to 15 per cent equity in a company. Under special provisions, LIC can hold up to 30 per cent with the approval of the government, investment committee and the regulator.

The proposal also goes against LIC’s own investment mandates, which prevents it from taking over any business. Obviously a decision rammed down the throats of the insurer, without so much as a by your leave. From being asked to bail out government’s public floats to keep disinvestment receipts buoyant, LIC has now been forced to swallow a bank. In 2016-17 the LIC’s Annual Report stated the “Corporation subscribed an amount of Rs 1, 24,174.25 crore and Rs 1, 40,714.30 crore” (both book value) of securities issued by the Government of India and loan issues of the various state governments. Bottom line, were the 29 crore LIC policy holders who plough hard earned money back as insurance premium asked to give their inputs on this concentration of risk deal. Hand maiden for long of governmental intervention, LIC has been asked to eat crow this time.

LIC has lost money in 18 out of 21 PSBs in the last two and a half years. While it is buying an additional 40 per cent in IDBI Bank (it already holds 11 per cent), LIC has been trimming its exposure in other PSBs.  LIC has pared its stake in Corporation Bank, Bank of Maharashtra and Bank of India over the past one year from 18 per cent to 13 per cent, from 12.72 per cent to 5.72 per cent and 12.83 per cent to 8.77 per cent respectively. Which means that it understands the clear and present danger of remaining invested in PSBs where performance has been under whelming. At the end of March this year, the government-owned insurance major had equity investments of over 1 per cent in 21 PSBs but only three of them are now trading at a higher stock price than their prices at the end of December 2015.

However, its equity investments record  is slightly better — Life Insurance Corporation (LIC), India’s largest domestic institutional investor, was busy shopping on Dalal Street all through December quarter and handpicked shares from across the sectors such as banking and financial services, FMCG, upstream and downstream oil and gas, ports as well as IT.  Among the large caps, LIC increased its holding in IT major Tata Consultancy Services1.23 per cent (TCS) to 4.17 per cent as of December 31, 2017 from 4.03 per cent as of September 30, 2017.  TCS posted 1.3 per cent quarter-on-quarter (QoQ) increase in net profit at Rs 6,531 crore for the quarter ended December 31, 2017, largely meeting Street estimates.  LIC also increased holdings in Sun Pharma 1.86 per cent (from 4.36 per cent to 5.53 per cent) and Punjab National Bank (from 12.20 per cent to 13.94 per cent). In the FMCG space, it bought into Britannia and Hindustan Unilever (HUL), raising its holdings in the two firms from 3.53 per cent and 2.08 per cent to 3.79 per cent and 2.55 per cent, respectively. HUL reported a 27.74 per cent jump in December quarter profit at Rs 1,326 crore on volume growth and margin improvement across categories. The company had posted Rs 1,038 crore profit for the October-December quarter a year ago.

This unfortunate process of consolidation that the government is resorting to — be it oilcos or now crenelated banks is fraught with risk for not only have you spent good money on these entities in the past, but you are now aligning them with relatively financially stronger partners and increasing their exposure to badly run and mismanaged companies. And what about the hapless policy holders and their investments in LIC? They have invested in securing their future and are hopeful of bonuses, will this too be undermined?  A perfectly legitimate operation run by LIC is being compromised and subverted because a rogue establishment has to be saved by the government. From bailing out devolving public sector issues, LIC, guardian of life insurance in the land with hopes and aspirations of people tied into it has been turned into a White Knight in a Black hearse. Such is the arrogance of governments. Ignoring the axis of commerce and basic rudiments of finance, pray what will LIC do with a bank? Is that its core competence? Latest figures for LIC show that through its capital market operations in FY 2018, it has reported a 33 per cent rise in profit from sale of investments to Rs 28,527 crore. Good money will once again follow bad through this bizarre deal.