While restricting LIC from buying good stocks makes no sense, it should be guided by the interests of policyholders and not the Government.

One cannot per se find fault with the Government’s decision to allow the Life Insurance Corporation of India (LIC) to take up to 30 per cent equity stake in individual companies, as opposed to the existing 10 per cent limit prescribed by the insurance sector regulator. The country’s largest domestic institutional investor, as it is, holds over 25 per cent in Corporation Bank and between 10 and 20 per cent in a dozen or more entities, from State Bank of India and Punjab National Bank to L&T, Tata Steel and ITC. Since offloading of its excess stakes in these companies is not a feasible option at least in the immediate future – not to speak of the larger destabilising effect this could have on the markets – the latest relaxation only legitimises a fait accompli of sorts.

But that apart, one could question the very logic of not permitting any insurer to own more than 10 per cent of a company’s equity. Insurance firms typically have a long-term horizon when it comes to making investments, and picking up large stakes in select companies is not inconsistent with this overall strategy. In LIC’s case, the leeway is all the more justified, given that its outstanding equity investment corpus alone is in the region of Rs 2.6 lakh crore. Also, the Indian equity market wealth is not so evenly distributed as to give LIC a reasonably large pool of companies to choose from. Just the top 50 companies on the National Stock Exchange account for nearly 60 per cent of the value of 1,700-odd stocks listed on it. Moreover, if the idea of limiting equity exposure to a single company is meant only to protect the interests of policyholders against the risks of concentration, that objective is better served by prescribing such limits vis-à-vis the insurer’s own investible resources. The Insurance Regulatory and Development Authority’s current prudential investment norms, in fact, do require insurers to not allocate more than 10 per cent of their shareholders/policyholders’ funds to a single company. But since this is conflated with the other 10 per cent-of-equity ceiling condition on a ‘whichever-is-lower’ basis, the former is rendered irrelevant as far as LIC goes.

That said, one cannot rule out the possibility of the Government hiking LIC’s equity investment limit in companies to 30 per cent in order to aid its own divestment programme in public sector undertakings. There is no doubt that LIC, in recent times, has performed such bailout acts, raising questions whether its investment decisions are guided more by policyholders’ interests, or the needs of the exchequer. While one cannot grudge LIC being given greater headroom for making investments – restricting it from buying even potentially good stocks simply because the 10 per cent equity limit has been breached makes no sense – the public sector insurer should ultimately, however, be accountable mainly to its policyholders.

(This article was published on November 22, 2012)
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