Harish Puppala | Rakesh Sharma
Moneycontrol Contributors
Ananyaashcintayanto maam ye janaah paryupaasate Teshaam nityaabhiyuktaanaam yogakshemam vahaamyaham
The last two words there - yogakshemam vahaamyaham - are the motto of the Life Insurance Corporation of India. Translated word to word, the shloka from the Bhagavadgita, means:
“Those persons who, becoming non-different from Me and meditative, worship Me everywhere, for them, who are ever attached (to Me), I arrange for securing what they lack and preserving what they have.”
Old Testament-style self-aggrandisement notwithstanding, it appears the LIC has taken its motto a little too literally. The proverbial white knight is out once again to perform a rescue operation, this time the beleaguered IL&FS. Damsel company in distress - here I come, hands cupped, trying to keep your light(s) on.
The Life Insurance Corporation of India (LIC) is arguably the most ubiquitous financial institution in the country. Go anywhere, even far into the interiors - our agrarian society where you can go hours, even days, without realizing we are now in the 21st century - and you’re likely to come across many blue-and-yellow boards hanging off ledges, with the LIC logo and half-eroded lettering about jeevan bima. I think the only brands more ubiquitous are, probably, Thums Up, Colgate and Paragon. However, LIC is the omnipresent one.
It’s no wonder then that it is the largest insurance company in India, with assets valued at over Rs 25 lakh crores or approximately 350 billion $. Finance minister Arun Jaitley said in 2016, “LIC has been created as a monolith. If you (LIC) were the company listed on the stock exchange, perhaps you would be the most valued company.”
What’s not as well known, outside of financial circles, is that LIC has been the government’s very own bailout agency. While focus on this aspect of LIC has been rather understated, the latest instance of LIC providing life support to yet another government organization that had its debts called in has attracted criticism. The main thrust of said criticism is the repeated use of LIC to rescue large financial corporations that seem to flounder due to dodgy decision making.
Quis custodiet ipsos custodes? (Who guards the guardians? Hint: LIC)
Well, it would be funny if it didn’t involve so much public money.
IL&FS, or Infrastructure Financing and Leasing Services Ltd, is an investment company. It serves as the holding company of the IL&FS Group. What does the IL&FS Group do? It was was founded in 1987 with equity from the Central Bank of India, Unit Trust of India, and Housing Development Finance Company to fund infrastructure projects. It came to the rescue, if you will, of infrastructure when financial institutions like IDBI and ICICI were focusing on corporate projects. A large part of the group’s operations are based in companies that form what Qruis.com calls “an ecosystem of expertise across sectors such as infrastructure, finance, and social and environmental services.”
News broke last month that the group had defaulted on debt amounting to around 3,800 crore rupees. Financial Express reported that the group had been facing liquidity issues for a while and had defaulted on a Rs 1,000-crore debt from Sidbi, or Small Industries Development Bank of India. Then, on September 14, it defaulted on a repayment of Rs 105 crore and, on the following day, defaulted on Rs 80-crore inter-corporate deposits
At the time, economic affairs secretary Subhash Chandra Garg had said, “IL&FS is independent of the government. It has independent board and shareholders…(it) needs to resolve its issues on its own and I think it is capable of doing it.”
Though IL&FS is a private entity, government firms hold over 40 percent of its shares. It’s an easy guess what one of those companies is named. Yes, LIC. So, the government had to step in and ensure IL&FS remained solvent in order to maintain financial stability in the country. Because IL&FS owns infrastructure and financial assets that are valued at over $ 15 billion. The government insist that the debts are a result of mismanaged borrowings. Borrowings which include Rs 57,000 crores of bank loans, with large amounts from public sector lenders.
We’ve covered this issue in other podcasts but, as things stand, the group has a new board that will look into the financial crisis. A Moneycontrol report noted that the board would examine asset sales over the next few months that could reduce debt, but an immediate loan from LIC is a possibility after LIC’s chairman V K Sharma went on record to state that IL&FS will "not be allowed to fail". After a meeting at the finance ministry, Sharma told the media, “We will ensure IL&FS does not collapse. We will not allow contagion to spread from IL&FS…All options are open (including raising stake in the company).” Strong rhetoric from the LIC boss there. Also, given LIC’s 25.34 percent stake in IL&FS, it could well bail out the group which is a big presence in shadow banking in India.
Bailout Corporation of India
Thanks to annual premium collections of Rs 3.18 lakh crore, the government-owned insurer has enough funds to play savior. In fact, since inception in 1956, LIC has intervened on behalf of ‘investees’ repeatedly. If anything in India is too big to fail, chances are LIC will do some of the saving, if not all of it.
Calling LIC the Bailout Corporation of India might sound like snark, and the organization itself has expressed displeasure over such names, but such statements are not exactly bereft of truth. Moneycontrol.com noted recently, “LIC is no stranger to ‘shortage of fund’ situations in investee companies. Be it through ...IPO.. stake sale, qualified institutional placements or offer for sale, large institutions have sought LIC's assistance whenever they have faced a cash crunch.”
That’s a polite way of saying LIC has saved many organizations from the consequences of some questionable decisions. For instance, in the present case, IL&FS plans to reduce its debt of Rs 91,000 crores by selling multiple assets on a short-term basis. LIC, a large investor in equity as well as debt, saw its balance sheet size jump by 10.4 percent to Rs 27.9 lakh crore by the end of the last fiscal. Its traditional business, the life fund, stood at Rs 20.79 lakh crore rupees.
A Rs 4,500-crore rights issue is pending for approval, of which, surprise surprise!, LIC could be a key buyer if the new board greenlights the arrangement.
Large divestments by the government in public sector companies have resulted in LIC acquiring sizeable stakes in those firms. As part of a recent deal, LIC will hold a 51 percent stake, or a majority stake, in psu bank IDBI. The bank has a high level of non-performing assets (NPAs) and provisions. It reported a net loss of Rs 2,409.90 crore in the June quarter, a huge jump from the Rs 853 crore in the same quarter a year ago. IDBI has been looking to hive off its non-core assets. That responsibility now lies with LIC.
IPOs by state-owned companies IPOs have received incredible support from LIC. In 2014, State Bank of India brought a large offer-for-sale where LIC contributed a ‘substantial’ part of the 7,300 crores that the bank received. In August 2015, LIC purchased 86 percent of the shares on offer in Indian Oil Corporation.
In May of 2016, the government asked LIC to invest 10 percent in NIIF - a quasi-sovereign fund to help fund India’s infrastructure requirements. It also purchased part of the UDAY bonds issued by state governments in 2016 as part of the bailout package designed by the central government for debt-ridden state power utilities. In FY16, PSU banks launched 26 bond issues, raising Rs 29,165 crore. LIC bought some of hose bonds - worth approximately Rs 8,000 crores.
It also invested close to 5,000 crores in banking equity in 2015-16. In 2017, LIC invested approximately 4,300 crores in the OFS by NTPC, taking almost half of the stake on sale. The Rs 4,200 crore Hindustan Aeronautics IPO earlier this year saw the insurance company buy a massive 69 percent stake in the defence organization. In the New India Assurance IPO, LIC bid for a whopping 70 percent of the issue.
The exception to the rule
The extent to which this happens can be gauged by one simple rule, and the exception to that rule. As per IRDAI investment norms, no insurer is allowed to hold more than a 15 percent stake in one single entity. That rule is was put in place to ensure that risk is diversified and investment managers do not get too carried away by the prospect of gains from any opportunity. The exception to this rule? LIC.
According to the finance ministry, the LIC Act of 1959 supersedes the Insurance Act.
The act allows the insurer to have a 30 percent stake in one company. LIC called companies where it has over 15 percent stake ‘legacy’ investments. It claims they have been given additional time to bring down LIC’s stake below the 15 percent threshold. If LIC subscribes to the IL&FS rights issue, its stake in the company will increase beyond the current 25.34 percent. Some analysts say that this is an
exceptional circumstance, hence it is probable that LIC will be required to inform the regulator of the stake hike as well as the roadmap towards the reduction of that stake to acceptable levels.
In 2016, JN Gupta, managing director, Stakeholders Empowerment Services, a proxy advisory firm, had warned that protecting policyholders’ interests must remain the priority. He told Livemint, “Where is the independence of LIC? If it is independent, why does it bail out the government through investments in bonds, equity or infra funds? Interest of the policyholders is key. They should get the best returns for their money. The functioning and investment decisions should be independent and not prompted by the government. But as long as LIC’s investments are in the interest of the policyholders, one cannot question those investments.”
He added that LIC picking up non-voting shares in banks at a price that was not discounted was unfair to policyholdeRs He said, “In state-run banks...voting rights are capped at 10 percent. So, in instances where LIC picked up more than 10 percent stake in state-run banks and is not getting voting rights, one can question why LIC did not purchase these shares at a discounted price.”
Two years on, his questions remain valid.
Monika Halan had flagged LIC’s frequent rescue acts back in 2012, when the insurer had bailed out ONGC. She wrote, “LIC is seen as a giant money collecting machine that has its reach all over the country through three million agents selling insurance. Except that they don’t. What they really sell is a cumulative bond that returns not more than 5 percent with a tiny crust of life cover.”
She claimed LIC’s essentially sold ‘with-profit traditional policies’ - endowment or money back plans that get a share in the profit that the investment part of the premium makes. Halan wrote, "What it (LIC) really sells is the promise of recurrent collection of money in the form of premiums...and a payout either on death or at maturity of an amount that has cumulatively earned about 5 percent annual return.”
She further said nearly 60 percent or Rs 5.9 lakh crores (in 2012 terms) of policy holders’ investments were in government securities and government-guaranteed bonds including treasury bills. While insurance companies buying government bonds is within the rules, the use of LIC policyholders’ funds to buy stock of PSUs was in breach of IRDA rules.
Breaking the habit
As a consequence of such decisions, LIC is now a major player in the loan market without being a bank. Experts worry that a dangerous precedent is being set by LIC even as India struggles to negotiate the NPA crisis. Even the RBI expressed unhappiness regarding the insurer’s links with banks and flagged the risk of contagion in case things go south at LIC.
Business Insider noted in a column that crisis “had largely been believed to have had manageable systemic risk with fairly low liquidity concerns - until now.”
LiveMint reported that less than 1 percent, or only about 1 lakh crore, came from LIC’s shareholders and the rest was made up of policyholders’ money. The risk in such a scenario is obvious. That IDBI bit we discussed? While LIC did indicate that it will reduce its stake in IDBI, no timeframe has been set. And that is cause for concern. LIC had earlier made an investment in Corporation Bank over the 15 percent limit, acquiring a 27 percent stake. Experts point out that the insurer took around 16 years to pare that stake down to safe levels. 16 yeaRs
A mild warning went out from the Insurance Regulatory and Development Authority of India, asking insurance companies to make ‘prudent’ decisions when investing in businesses whose credit ratings have been downgraded. Subhash C Khuntia, chairman of IRDAI, said, “Normally, when there is a downgrade, insurers should withdraw their investment and place it somewhere else.” He added that it was up to the insurer to derive maximum value from investments. The National Organisation of Insurance Workers also opposed LIC’s plan to bail out IL&FS. IUt stated, “thousands of crores of rupees collected by the LIC from ordinary Indians as premium is at stake.” Joydeep K. Roy, partner and leader- insurance sector at PwC, told Business Insider that LIC’s investment in IDBI too was an extraordinary event that should not be allowed as a precedent.
He explained, “Insurers holding a larger share of any one company for policyholders’ funds can increase the entire risk profile of the portfolio. However, this is ultimately an equity transaction for policyholder funds and can result in profits or losses.” Sanket Kawatkar of Milliman India, warned that LIC policyholders’ benefits would be adversely impacted if LIC ever incurs a loss on this investment.
If that sounds like a doomsday scenario, well, there is a reason experts are wary. In the 2008 crisis in the US, insurance giant AIG nearly collapse under the massive weight of its outsized exposure to soured loans thanks to investments in risky credit default swaps. It took no less than the US Federal Reserve to bail out AIG by giving a crucial loan of $85 billion that kept it solvent. That’s right, an $85 billion loan.
The analyses, maybe even the consensus, seems to suggest that the the insurer’s priority does not seem to be aligned with policyholder’s best interests. Sure, there has been insistence from successive governments but the question is more relevant than ever: can LIC, as an insurance company, really afford to use policyholders’ money to bail out so many failed or faltering public sector companies?
Yogakshemam Vahaamyaham is all well and good, but the question is – whose yogakshemam?
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