Mumbai: Life Insurance Corporation of India (LIC) will likely step in to buy between a third and half the equity assets of the Specified Undertaking of the Unit Trust of India (SUUTI), said two persons with direct knowledge of the plan.

The purchase from SUUTI, an offshoot of the erstwhile Unit Trust of India (UTI), could mean spending of between 25,000 crore and 30,000 crore for the state-run insurer, and an equivalent windfall for the government.

With assets worth at least 20 trillion, LIC has often come to the government’s rescue in large divestments.

In recent months, the government has also leaned on the insurer to support a number of its other initiatives: offering soft loans to the railways, subscribing to the power sector’s Ujwal Discom Assurance Yojana bonds and investing in the National Investment and Infrastructure Fund.

Now, the government has asked LIC to buy a significant part of the assets of SUUTI, which holds minority stakes in many listed and unlisted companies.

“The government approached LIC, proposing to sell a majority of SUUTI’s holdings to LIC, while the balance could be sold either through an offer-for-sale or through any other secondary market route to the public," said one of the two persons cited above on condition of anonymity.

SUUTI has shares in 43 listed and eight unlisted firms. It holds 11.17% in ITC Ltd, 8.32% in Larsen and Toubro Ltd (L&T) and 11.93% in Axis Bank Ltd. At Tuesday’s closing stock prices, SUUTI’s holding in ITC is worth 22,296.54 crore, in Axis Bank, 15,973.13 crore, and in L&T 12,151.85 crore.

SUUTI also holds shares in other blue-chips such as ICICI Bank Ltd, Bharat Petroleum Corp. Ltd, Hindustan Unilever Ltd, Titan Co. Ltd, Tata Steel Ltd and Reliance Industries Ltd. The combined value of SUUTI’s holdings in listed firms is estimated at around 60,000 crore. The value of its holdings would be higher if its shareholding in unlisted firms is taken into account.

“The government will not sell all of SUUTI’s holdings at one go. The sale will be done in two to three tranches," said the first person. “LIC has been asked to pick up at least a third of the overall SUUTI holdings. This primarily includes (its holdings in) ITC, Axis Bank and L&T. The cost of the deal could be 25,000-30,000 crore for LIC."

“LIC is willing to buy the shares since most of these companies have performed very well and have grown to be giants in their respective industries," this person said.

LIC did not respond to an e-mail seeking comment.

The second person said the insurer had agreed to the government’s proposal.

“LIC has given an informal nod to the government’s proposal to sell SUUTI stakes to LIC. Being a long-term investor , LIC can take contrarian calls and large positions in companies if the investment benefits its policyholders, shareholders and fits its long-term growth plans," added this person, who also asked not to be identified.

One challenge that LIC could face is the regulatory restriction on equity holdings in individual firms. The Insurance Regulatory and Development Authority of India allows the insurer to hold maximum equity of 15% in a single company.

If the government sells a significant chunk of SUUTI’s holdings to LIC, the state-run insurer, which already owns shares in many blue-chips, the 15% limit could be breached in some companies.

LIC’s investment committee will take a final call on the investments.

According to Sanjay Sinha, founder of Citrus Advisors, an investment advisory, the government’s plan may be a prudent approach to ensure that its divestment target is met.

“LIC can buy any amount of stake in any firm even when the market is at a low," said Sinha. He, however, cautioned that it was up to the insurer to take a call on the purchase. “The government should not force LIC."

Last week, the government invited bids from bankers for the mandate to manage the SUUTI stake sales.

A meeting between SUUTI officials and merchant bankers is scheduled for 15 July in Mumbai. Bankers will be required to submit their bids by 1 August. The government, along with SUUTI, will shortlist up to three merchant bankers to handle the sale.

India’s Parliament bifurcated UTI in 2002, creating SUUTI and UTI Asset Management Co. Pvt. Ltd, the former holding the assured-return investment plans of UTI and the latter overseeing market-linked plans. The bifurcation took place after UTI’s US-64 investment scheme ran into trouble.

The government has considered selling SUUTI assets several times in the past. This time, the decision has been driven by the need to meet an ambitious divestment target and a conducive market environment.

The benchmark BSE Sensex has rebounded about 21% to 27,808.14 points on Tuesday from its lowest closing this year of 22,951.83 points on 11 February. This could help fetch attractive valuations for the holdings.

“The market has been generally good and the investor confidence is clearly returning as is evident from the performance of recent primary market offers. The government finds this the best period to sell its holdings in domestic firms held through SUUTI," said the second person.

The government has an ambitious divestment target of 56,500 crore for 2016-17, of which 36,000 crore is expected to come from minority stake sales in state-owned companies. The remaining 20,500 crore is expected to be raised through strategic sales in both profit-making and loss-making state-owned companies.

So far this financial year, the government has raised 2,716.55 crore from a stake sale in NHPC Ltd, according to the department of investment and public asset management.

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