Filling up the coffers

The Centre is hard-pressed to meet its divestment target this year, but this is no excuse for repeatedly compromising the interests of investors. Recent diktats such as the one asking Coal India to pay a special dividend and directing ONGC and OIL India to purchase a 10 per cent stake in the beleaguered Indian Oil Corporation have been issued primarily for a quick fill of the coffers. The Insurance Regulatory and Development Authority’s recent tweaks to its draft guidelines to enable insurance companies to invest in the soon-to-be launched PSU exchange traded fund, is another blatant attempt to use policyholder money to shore up the Centre’s finances.

The revised draft guideline allows insurers to invest in ETFs that have higher costs than that mandated earlier, relaxes the prudential limits on company and sector-specific exposure and requires the ETF to be listed on just one exchange instead of two. These revised rules are far less stringent than the initial guidelines issued in January and enable LIC to invest in this fund. But there is more than one reason why the PSU ETF is not the optimum investment for the government-owned insurer at this juncture. Unlike retail investors, an institution such as LIC is quite capable of selecting the best among the public sector stocks and buying them directly from the market. There is no need for it to take a basket exposure to the motley bunch of stocks that have been bunched together in the PSU ETF. Also, taking the ETF route may be sub-optimal from a liquidity standpoint for large institutional investors. As Indian investors have not really taken to ETFs, their trading volumes are thin and their prices tend to be far lower than the value of their underlying portfolios. Finally, institutional investors have been shunning government-owned stocks of late due to governance issues and regulatory flip-flops affecting the companies’ earnings. This is why the CNX PSE index has lost 36 per cent since August 2010 while the Nifty has gained 7 per cent in the same period. The LIC already has substantial exposures to public sector units, as it has regularly been stepping in to give the government a helping hand in the many recent divestment offers. The life insurer has already invested heavily in offers for sale including NTPC, SAIL, NALCO, MMTC and Hindustan Copper, with many of these investments now sporting losses.

The Centre needs to set a high standard in good governance practices — especially in institutions that manage public money. When the institution is as opaque as LIC (it does not disclose its portfolio every month as mutual funds do), transparency and best practices become even more important. For starters, LIC can be made to disclose its equity holdings more frequently. What is required is greater accountability rather than repeated transgressions by the Centre.

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