The Life Insurance Corporation's (LIC) act of acquiring bulk of the shares in ONGC put up for sale recently by the Government has inevitably raised doubts about the true extent of separation of ownership from management in the operations of public sector undertakings (PSU).
This is not to say that LIC's investment decision was, per se, flawed.Viewed purely on its fundamentals, there is no reason for LIC or, for that matter, any other institutional investor not to have bought ONGC shares at the price at which it was offered in the recent auction. The shares were, after all, priced at a multiple of current earnings in the region of 10-11. That's not too expensive for a company of ONGC's business profile with its vast oil exploration and production assets in a scenario of rising oil prices. Moreover, despite having to shoulder extra burden on oil subsidy, ONGC's profits have expanded by a fifth so far this fiscal. LIC's investment couldn't have been wrong also when most within the analysts' community had a ‘buy' rating on the ONGC stock at current prices. That said, one could still question the quantum of exposure that the insurer chose to take in the oil major. True, in placing its bids, LIC made sure that didn't exceed the prudent limit of 10 per cent. But given its annual stock market investments of around Rs 45,000 crore, the decision to deploy nearly one-fourth of this value in a single stock does raise eyebrows. Had it been an isolated instance of a stake acquisition, it would have elicited nothing more than a passing notice. But that wasn't the case. The ONGC acquisition came on top of a string of acquisitions in other PSUs, whose offers of sale in the market might well have failed had LIC not stepped in.
In retrospect it must be said that this approach hasn't really paid off. While NTPC or NMDC, the two other PSUs where LIC picked up large stakes, have suffered stock market losses, Coal India, where it didn’t, has delivered gains. LIC's policyholders, in other words, would be justified in wondering if these decisions are not dictated by the Government's larger concerns of public policy. Part of the problem lies in the lack of public information about LIC’s investment operations. Its portfolio composition, investment strategy or stock market operations are not subjected to the public disclosures mandated for money managers such as mutual funds. Disclosures apart, LIC would do well to explain the rationale behind its major investments, to prove to its policyholders that it makes its own decisions. Also, LIC can use the sizeable holdings it has in many companies to play a more activist role in protecting the rights of public shareholders, especially when it comes to mergers and restructuring proposals. Finally, minority shareholders in PSUs would surely benefit if LIC intervened to safeguard their rights on discriminatory buybacks or draining of cash reserves of these companies.