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Investment ceiling hike could raise risks for LIC

Analysts say the govt is looking to undermine Irda’s authority through some legal loopholes
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First Published: Tue, Nov 20 2012. 09 25 AM IST
The move could lead to increased concentration risk for LIC which has an investable corpus of `2.25 trillion for the current fiscal. Photo: Mint
The move could lead to increased concentration risk for LIC which has an investable corpus of Rs.2.25 trillion for the current fiscal. Photo: Mint
Updated: Tue, Nov 20 2012. 11 06 PM IST
New Delhi: The finance ministry’s decision to increase the investment ceiling for Life Insurance Corporation of India (LIC) undermines the authority of the insurance regulator and could lead to charges of discrimination by private insurers, analysts said.
The finance ministry had allowed the state-run insurer to invest up to 25% in a listed company, overriding objections from the regulator, The Economic Times newspaper reported on Tuesday.
Increasing the investment limit for LIC is likely to provide a huge boost to the government’s struggling Rs.30,000-crore disinvestment programme, but could lead to increased concentration risk for the state-run insurer, analysts said. LIC has an investable corpus of Rs.2.25 trillion for the fiscal year to March.
An insurance firm cannot hold more than 10% in one company, investment guidelines prescribed by the Insurance Regulatory and Development Authority (Irda) say.
Analysts said that though the insurance law empowers the regulator to oversee the business activities of all life insurance companies, the government is looking to undermine Irda’s authority through some legal loopholes.
“Irda is empowered to look into the business aspects of all insurance companies, including their investments and products. LIC also comes under Irda’s purview,” said Ravi Trivedy, an independent consultant.
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An LIC spokesperson did not respond to a phone call or an email.
Irda chairman Hari Narayan did not respond to a call and a message left on his mobile phone. Finance ministry officials could not be reached for comment.
“Though technically the government has the powers, it is not correct on its part to unilaterally take such decisions and put at risk the policy holder funds,” he added. “Why doesn’t the government use its powers and allow cash-rich banks to pick up stakes in companies more than what is allowed by RBI (Reserve Bank of India)?”
Differences between the finance ministry and the central bank are already evident.
Last week, a day after finance minister P. Chidambaram nudged the central bank to hasten the process of issuing new bank licences, RBI governor D. Subbarao said the permits could be given only after the groundwork was in place and all “enabling conditions” met. Before that, the ministry and the regulator had differences over RBI’s decision to hold key interest rates in its October review of the monetary policy.
LIC’s holding in many top-listed companies is above 10%—the regulatory limit. LIC and the government maintain that there is no violation of norms as the state-run insurer invests through different funds on the traditional and unit-linked platform. They are of the view that the regulatory ceiling of 10% is on each fund rather than on the total investment by LIC.
“Relaxation in investment ceiling in individual companies is not relevant for the private sector since none of the companies have a very large investable fund corpus as compared to LIC,” said the chief executive of Mumbai-based private insurer, who declined to be named. “But regulations should be uniform for all the life insurance companies.”
Earlier this year, LIC had to come to the government’s rescue by helping it in the capitalization of state-run banks and in Oil and Natural Gas Corp. Ltd’s (ONGC) sale of shares. It bought a 5% stake in more than half a dozen public-sector banks and subscribed to most of the ONGC shares on offer.
“Till the LIC Act is in existence, the government is authorized to make some exemptions for LIC. But Irda draws its powers from the Insurance Amendment Act and regulates all companies,” said a member of the financial sector legislative reforms commission, who did not want to be identified. “The problem that will now arise is that what will be the rules that the other private companies have to follow? The question of level-playing field will come in,” he said.
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First Published: Tue, Nov 20 2012. 09 25 AM IST
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