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Business News/ Opinion / Online-views/  Should the ONGC issue bailout by LIC worry you, the policyholder?
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Should the ONGC issue bailout by LIC worry you, the policyholder?

Should the ONGC issue bailout by LIC worry you, the policyholder?

Illustration by Shyamal Banerjee/Mint.Premium

Illustration by Shyamal Banerjee/Mint.

Last week’s bailout of the ONGC stake sale by Life Insurance Corp. of India (LIC) has turned the spotlight on an institution that is a household name in India and now finds itself being publicly questioned over its investment decisions. Should you be worried about your money in government-owned LIC that was set up by an Act of Parliament and carries a sovereign guarantee? The guarantee gives policyholders the safety net they need in terms of a promised return of their money, but to contemplate a government payback of just over 25 trillion (the sum assured on almost 300 million policies), in a situation where such a bailout is needed, would be quite a disaster. But let’s not think about that. It’s safer to stay with worrying about returns rather than the risk of a sovereign default.

Illustration by Shyamal Banerjee/Mint.

The bulk of LIC’s portfolio comprises what is called “with-profit traditional policies". These are endowment or money back plans that get a share in the profit that the investment part of the premium makes. What it really sells is the promise of recurrent collection of money in the form of premiums (we could also call it a deposit and not be wrong) and a payout either on death or at maturity of an amount that has cumulatively earned about 5% annual return. That’s below inflation, so why does it sell so well? Well, if you’re the government then you can fix that. The premium gets a tax break, the corpus on death or maturity is tax free, making it more palatable to the investor. Throw in first-year commission of 40% to the selling agent, and you have a fat pipeline that sucks out money from the small investor. (As an aside, despite this gouging of commission from the premium, the incentive was not good enough to increase insurance penetration beyond 2% for the decades that LIC was a monopoly.)

So, where does this money go? The circle gets completed when you look at the investment pattern of LIC. Almost 60% (Rs 5.9 trillion) of policy holders’ investments (according to form L-13 available here: are in government securities and government-guaranteed bonds including treasury bills. While LIC (and other insurance companies) buying government bonds is an old story and is according to the rules of the game, the new story is the use of LIC policy holders’ funds to buy stock of public sector units (PSUs) in breach of rules fixed by the Insurance Regulatory and Development Authority (Irda). The government recently gave the go-ahead to LIC to raise its stake in PSU banks higher than the 10% threshold the regulator mandates. Both mutual funds and insurance regulators prescribe prudential norms of investment that stipulate a limit of 10% in the equity of a company. LIC’s investment in PSU banks has recently breached this limit with the permission of the government. The regulator is reduced to expressing unhappiness in press reports at this violation of its rules.

The government’s comfort in having LIC at the other end of its phone line is felt by the regulator in its day-to-day functioning as well. Offline conversations with people in Irda reflect their inability to get LIC to play ball even in bread-and-butter regulatory issues. Irda’s annual report some years back, say insiders, was delayed almost by a year as data from the PSU insurer was difficult to get. For those who’ve followed markets in India, can you remember another government-promoted monopoly, that, after liberalization of the industry, hid behind its special status for a long time; did not submit to the new regulator; was opaque about its functioning? Until something called the Unit 64 fiasco tipped it over. It’s still early days to say if ONGC will be the beginning of a bigger unravelling.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at

Also Read | Monika Halan’s earlier columns

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Published: 06 Mar 2012, 08:07 PM IST
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