Opinion | Has IRDAI failed to protect policyholder interest by okaying LIC-IDBI deal?

The Insurance Regulatory and Development Authority of India (IRDAI) must explain the decision to allow the Life Insurance Corporation of India (LIC) to increase its stake in IDBI Bank up to 51 percent. The insurance regulator must clearly spell out the reasoning for allowing this stake increase and whether it is a one-off.

Media reports say IRDAI’s approval for a stake increase comes with the rider that LIC must ready a plan to pare its stake to 15 percent over a period. But this exception for LIC raises questions about the sanctity of the 15 percent cap. According to the regulator's norms on investment, insurance companies cannot hold more than 15 percent stake in any company.  Will the insurance regulator allow a proposal by say, HDFC Standard Life Insurance to own up to 48 percent of Indian Overseas Bank, for example?

Sure, there are instances of the Reserve Bank of India permitting 51 percent ownership in some banks. Earlier this year, billionaire Prem Watsa's Fairfax India Holdings acquired a 51 percent stake in Catholic Syrian Bank. But while part of the banking regulator’s mission is to promote financial sector stability, IRDA’s primary duty is “to protect the interest of and secure fair treatment to policyholders,” as the mission statement on its website says.

Did the regulator do its job by questioning the rationale behind LIC’s decision to acquire a bank where one out of every three rupees lent has turned dud?

The insurer already has stakes in most of India’s public sector banks and a few private sector banks. IDBI Bank is currently one of the worst performers with its net worth falling short of its net bad loans after Rs 17,000 crore of losses in the last two financial years. While a large chunk of the Indian banking system is struggling with a bad loan problem, there are lenders with better chances of a recovery out there. If LIC wanted to own a bank- and there is no clarity on whether this is an acquisition or large investment – there is still the question of whether IDBI is the right choice.

The excuse that the proposed investment of Rs 13,000 crore is just a fraction of LIC’s Rs 27-lakh crore odd balance sheet, doesn’t wash. Sure, it isn’t going to affect LIC’s solvency since it is, at the end of the day, an entity backed by the sovereign, but a poor performance can affect policyholder returns.

LIC’s decision is also muddied by the fact that a government official is typically part of its investment committee.  Indeed, the regulator had raised the issue of corporate governance in LIC in 2012 (https://bit.ly/2Kq2O9B) but has done nothing to tackle the problem. It is very well to say that this conflict of interest has always existed, but it calls into question whether IRDAI has failed in its duty in protecting policyholder interest by brushing the issue under the carpet.