Why LIC’s IL&FS move comes as a surprise

State-owned Life Insurance Corporation of India may have held discussions with the Finance Ministry before the appointment of its Managing Director Hemant Bhargava as the Non-Executive Chairman of Infrastructure Leasing & Financial Services (IL&FS).

The development, which is being seen as the first such case where the life insurer has been proactive in protecting its investments, is expected to help revive the ailing fortunes of IL&FS.

“It is clear that LIC would not have made such a big decision on its own, without any discussions, or even prodding, by the government. It is expected to help IL&FS improve its functioning and also give it some financial backing,” said a person familiar with the development.

An internal matter

The Finance Ministry has not commented on the development, and officials said it is an internal matter of LIC.

The IL&FS board has cleared an ₹8,000-crore business expansion plan where LIC could invest.

LIC is the largest shareholder in private sector and unlisted IL&FS, with a total stake of 25.3 per cent.

Earlier this month, Ravi Parthasarthy had resigned from IL&FS as Non-Executive Chairman. The board of IL&FS had then unanimously appointed Bhargava as the new Non-Executive Chairman with immediate effect. Whether Bhargava will be closely involved in the day-to-day functioning of IL&FS or take up a supervisory role is still unclear .

Information sourced from Prime Database reveals that top investments by LIC in listed companies include in LIC Housing Finance, Mahangar Telephone Nigam, Larsen & Toubro, ITC, NMDC and Axis Bank. Of these, it has nominee directors in six firms, including LIC Housing Finance.

“Till now, LIC was only the saviour of public sector units during disinvestment,” noted Prithvi Haldea, Founder and Chairman, Prime Database Group. Another analyst, who did not wish to be named, pointed out that LIC’s activism in the case of IL&FS is surprising, given that it has not shown such a stance in other investments.

“Look at what happened in ICICI Bank. LIC, as a shareholder had a director, but remained quiet and stayed away from a few board meetings.

“Barring IDBI Bank, where it was prodded by the government to acquire a majority take, the insurer has been a passive investor, and often remained silent even in other companies where it has invested but things have gone south,” he pointed out.

An e-mail questionnaire sent to LIC by BusinessLine on the issue did not elicit a response.

A collective decision

However, JN Gupta, co-founder of Stakeholder Empowerment Services, is of the view that the appointment of Bhargava as the Non-Executive Chairman of IL&FS would have been a collective decision of all shareholders.

“It is a welcome step as it will make the company management answerable to shareholders and also improve the functioning of the board,” he said.

IL&FS was set up as a joint venture between Central Bank of India, Housing Development Finance Corporation and Unit Trust of India.

Over the years, IL&FS has inducted institutional shareholders, including State Bank of India, Life Insurance Corporation of India, ORIX Corporation - Japan, and Abu Dhabi Investment Authority.

Apart from Bhargava, the infrastructure firm also has Praveen Kumar Molri as another Nominee Director from LIC on its board.

According to industry sources, IL&FS was hitherto being run like a private limited company by four to five people.

IL&FS verticals

IL&FS, which is registered with the RBI as a core investment company, has six verticals – surface transport, financial services, energy, environmental infrastructure, fund management and securities services. These verticals in turn have special purpose vehicles.

So, the exposure of the financial system (long-term borrowing of ₹10,195 crore and short-term borrowing of ₹4,561 crore as of March-end 2018) to it is at an elevated level.

“LIC is expected to provide governance. LIC now wants a chairman who actually ‘reports’,” said an industry source.

With inputs from K Ramkumar