If the Reserve Bank of India (RBI) is the lender of last resort for the Indian Government, the Life Insurance Corporation of India (LIC) — with some prodding from the Government that owns it — seems to be imposing the title ‘saviour of last resort’ on itself. In March 2012, LIC bailed out ONGC’s share auction after it received tepid response from investors. LIC made a revised bid for 12 crore shares in the nick of time after a broker’s mistake led to the rejection of its earlier bid.
The auction had earlier received bids for just 29.22 crore shares against 42.77 crore shares on offer through the institutional placement programme route approved by the Securities and Exchange Board of India.
More recently, LIC and other state-owned financial institutions bailed out Hindustan Copper’s (HCL) offer for sale (OFS) issue through which the Government sold 4 per cent to meet part of its ambitious annual divestment target of Rs 30,000 crore. Whether the insurance giant can act as the saviour of disinvestment is itself a matter that needs detailed debate.
The Rs 30,000 crore disinvestment target for this year was fixed despite a flop-show last year when actual receipts were an abysmal Rs 13,894 crore, as against an optimistic wish-list of Rs 40,000 crore. Prudence would have demanded that the Government keep the target low in the current year.
The timing of the issues seems to be putting spokes on the wheel of disinvestment for the Government. Despite announcing a target in the annual Budget, the Department of Disinvestment appears to wait till eternity to kick-start the action. If disinvestment is considered to be a priority, it should be a continual programme, and the present stance of the Government to wait for months and start the process towards the year-end, thinking that the budgeted targets will be met, will not impress many.
In the remaining months of the fiscal year, it appears unlikely that the target will be met.
Pricing and Timing
Pricing and timing of the issues is something that the Government has not been very good at.
Agreed, the Government is not selling all the family silver (or Navaratnas, as the Government would like to call them), but expecting a premium for each issue is certainly something that a lukewarm market will not rave too much about.
The response to the HCL issue was poor, with the bids coming at a weighted average price of Rs 156.56, slightly above the set floor price of Rs 155 a share and 41 per cent less than the closing price on Thursday.
This response is despite the fact that the issue was priced at a substantial discount to the traded price of the stock. LIC, along with public sector banks, apparently put in the majority of the orders in the last hour of bidding.
The Government has found itself at the wrong side of the debate several times when it came to pricing issues. In the case of privatisation of Maruti way back in 2003, the Government faced flak for over-pricing the issue.
In many follow-up public offerings, the Government kept deferring the issue, stating that the timing was not right, thereby making the mistake that many have made earlier.
The Disinvestment Department should stay away from looking at an appropriate time to do a sell-off, and should also permit proper price discovery for the unit — it would be appropriate to leave this to the market. They could make a start with the few heavyweight sell-offs, such as NMDC, that are due soon.
In a last-ditch attempt to mop up resources through disinvestment, the Finance Ministry has upped the limit for LIC to buy equity stakes in companies up to 30 per cent, from the present 10 per cent.
The Insurance Regulatory and Development Authority (IRDA) has strongly opposed the increase in limit, saying it would not be prudent, and pointing out that large exposures to individual companies could pose risks to LIC. IRDA is also concerned over any likely negative impact on LIC’s financials from its heavy annuity payouts. While the LIC going under is an unthinkable proposition, and is as good as the Government going down under, the DoD should ensure that it does not keep using the LIC as the saviour of last resort.
A few years down the line, LIC should not be left with the feeling that it was made to incur dead investments — the way the State Bank is apt to feel about Kingfisher Airlines.
(The author is a Bangalore-based chartered accountant.)