BackOurview | Troubling times at LIC
Ourview | Troubling times at LIC
PremiumIllustration by Jayachandran/Mint
Investment limits prescribing prudential norms in collective investment vehicles (CIV) such as mutual funds and investment-linked insurance plans aim to ensure diversification in assets held by the CIV. The regulation is across how much of own funds can be invested in a company (10% for each scheme) and how much of the company CIV can buy (10% of paid up capital). When it was drafted, the norm on the limit of owning no more than 10% of a firm aimed at preventing investors’ money from being used to fund the owner’s business interests. The recent regulatory consent by the Insurance and Regulatory Development Authority (Irda), as reported in Mint on Tuesday, to allow the Life Insurance Corporation (LIC) of India to breach the 10% limit in public sector bank shares raises several questions.
Two, why is it wrong for the owner of a company to use its own money to buy shares of some other companies it owns? It is wrong because the money that LIC has used to buy the shares of ONGC or PSU bank stocks in excess of the regulatory limits, belongs to the policyholders. It is not the government’s money—although it behaves as if it is. The government’s ownership is restricted to the Rs5 crore of paid up capital of LIC.
Three, why is Irda’s action such a worry? Because India now joins China as officially pursuing financial repression as government policy. A market is said to be financially repressed when the government designs rules to get access to cheap money, that would have otherwise gone to investment options that give better returns.
Financial repression has successfully been used by China (where deposits earn a negative real interest) to keep retail money in low-return bank deposits and the savings rates high. Banking regulation in India puts almost one-third of negative real return deposit money into government securities. LIC has 60% or Rs5.9 trillion of policyholder money (that earns policyholders between 3-4% return per year) in government securities and government guaranteed bonds including treasury bills. And we wonder why financial sector streamlining takes so long in India.
Should LIC be formally outside the purview of Irda? Tell us at views@livemint.com
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