Life Insurance Corp. of India (LIC) has lately been behaving like the Lifeline Corp. of India. The nation’s largest financial institution has bailed out two of the three share offers floated by the government as part of its disinvestment programme. The total amount of money bid by LIC in the recent share sales by NTPC, REC and NMDC is approximately Rs11,500 crore, not a sum to be sniffed at.
These could prove to be savvy investments in the years ahead. For now, they seem to be risky bets that have been taken for reasons beyond usual commercial ones. It is common knowledge that LIC has often been used by the government to stabilize the stock market, especially when the Unit Trust of India (UTI) went into a tailspin around 12 years ago. One part of the problem with UTI was that it offered guaranteed returns that were delinked from its net asset value, but another part was that it was forced to make investments under political pressure. LIC is unlikely to become another UTI, since its share portfolio is a small part of its overall investment portfolio. But it is being forced to take risky bets with money placed with it by insurance policy owners.
Illustration: Jayachandran / Mint
The two other investor groups in such share sales have the freedom to bid only if the price is attractive—retail investors and private sector institutional investors. Their reluctance to bid for shares can only mean that the issues have been overpriced. The initial view was that the NTPC and REC issues ran into trouble because the government was experimenting with French auctions to decide allotments. But the NMDC one was done through traditional book building—with similarly disappointing results.
The failure to attract adequate interest from retail investors— less than a quarter of the retail portion of these issues was subscribed to—constitutes a public policy failure as much as poor disinvestment design. Most countries have struggled with a privatization dilemma—should a government try to maximize revenues through strategic sales or should it try to sell shares a bit cheap so that there is widespread ownership. The United Progressive Alliance has clearly chosen the latter route, going by the last two budget speeches by finance minister Pranab Mukherjee. The way the NTPC, REC and NMDC issues have been priced suggests that the government continues to struggle with this dilemma.
India needs aggressive privatization in the years ahead, to increase efficiency levels in the economy and generate resources for infrastructure spending. The problems that the recent disinvestments have run into need to be sorted out fast. Using LIC as a safety net is not a long-term option.
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