Investor of last resort4 min read . Updated: 19 Feb 2012, 08:43 PM IST
Investor of last resort
Investor of last resort
The fiscally challenged United Progressive Alliance government seems to have found a saviour in LIC. For every fiscal obligation that it has to meet, it is making LIC foot the bill.
In compliance of this diktat, LIC has picked up 5% equity in Punjab National Bank. Dena Bank and Bank of Maharashtra have also allotted shares to LIC on a preferential basis. After this, LIC’s share in these banks will increase to 11%.
Syndicate Bank, Canara Bank, Allahabad Bank, and Andhra Bank are queuing up to get capital from LIC instead of the Union government.
As far as the government is concerned, it is a win-win situation; it helps it trim expenses and yet maintain its ownership and control over banks. But in the process, a complex and cumbersome structure of cross holdings within the government which is detrimental to governance and growth is being created.
The other big hole in the budgetary numbers is also being stitched by LIC. In view of a the huge shortfall in the disinvestment target—of the budgeted ₹ 40,000, only about ₹ 1,100 crore has been garnered so far—ONGC is making a preferential allotment to LIC. More seems to be in the offing as LIC has reportedly set aside ₹ 10,000-12,000 crore for spurring the government’s divestment programme and bailing out the budget.
Given the fact that LIC is owned by the government of India, all that is being done in the name of divestment is that shares of one government company are being parked in another government company. There is no change or dilution in the ownership. Only some money is moving from one budgetary head to the other. At best it amounts to internal divestment. At worst, financial incest.
A better and institutionally safe way to do both these equity transactions—banks and ONGC—would be for LIC to warehouse the shares for the Union government for a specified period. With a proper buy-back arrangement, the government could have got out of its bind and LIC and its millions of investors insulated.
The government’s misuse of LIC doesn’t stop with equity investment. Even on the debt side, LIC is being asked to subscribe to the ₹ 7,400 crore non-convertible debentures (NCDs) being issued by Air India to raise funds for repayment, which is a part of the debt recast plan. The issue is virtually debt contracted by the government as not only is Air India owned by the government, for good measure these NCDs are guaranteed by the government.
There is nothing unusual about LIC investing in such paper, but the problem is that the ₹ 7,400 crore issue to which LIC is being asked to subscribe to is to be paid to banks as a part of the debt recast package. And if it is not done by 20 March, 26 banks will have to classify their exposure to Air India as a non-performing asset. So it is a bailout rather than an investment of or by choice.
Both the equity and debt investments that LIC is making to help the government violate the letter and spirit of its investment philosophy as also the underlying idea of disinvestment.
The “primary objective and obligation" of LIC, according to its own charter, is “to its policyholders, whose money it holds in trust...to the best advantage of the investors and obligations of attractive return". Instead, the above investments have been made out of obligation to the government and not the investors. Indeed, by doing so, it is seriously compromising its position in the financial sector, its mandate as an institution and credibility as a large investor.
As it is, LIC has too close a relationship for comfort with the government in its securities market operations. A disproportionate part of LIC’s portfolio is earmarked for the government. Of the total investment portfolio of nearly ₹ 10 trillion, almost two-thirds is invested in government securities, bonds and treasury bills.
With what it is being asked to do now in terms of bailouts, LIC will be second only to the Reserve Bank of India (RBI) in its financial relationship: if RBI is the lender of last resort for the government, LIC is fast becoming its investor of last resort.
The enabling change—removing the 10% cap on LIC’s investment in government-owned companies—has been made recently so that LIC can bail the government out of its divestment disaster.
The systemic implication of this change and how LIC is being used are dangerous. If at any time RBI acts tough with the government, LIC is well positioned to become an on-tap lender to the government. This is a systemic danger.
Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comments are welcome at firstname.lastname@example.org
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