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Business News/ Companies / News/  LIC—the government’s all-time financier—stays away from bailout of bank
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LIC—the government’s all-time financier—stays away from bailout of bank

If SBI curbs its holding in Yes Bank in future, subject to the capping of 26% for three years, LIC may find a headroom to invest in the bank
  • If the rescue plan works and Yes Bank’s shares gain, SBI and other investor banks may get a comfortable exit but only after three years
  • State-owned Life Insurance Corporation of India has assets worth about ₹30 trillion. (Ramesh Pathania/Mint)Premium
    State-owned Life Insurance Corporation of India has assets worth about 30 trillion. (Ramesh Pathania/Mint)

    MUMBAI : State-owned Life Insurance Corporation of India (LIC), which has often acted as the government’s handmaiden in the rescue of ailing financial institutions and the saviour of public sector divestments, has stayed out of the 10,000-crore equity bailout of Yes Bank Ltd. The reason: State Bank of India (SBI) has agreed to buy 49% in the crisis-hit bank and LIC’s entry would take the combined shareholding of government institutions in Yes Bank above 51%, which would likely require legislative changes and cause delays.

    Two persons familiar with LIC’s strategy confirmed this. However, there is nothing to stop the insurer from picking up a stake in Yes Bank in future as and when SBI reduces its stake in the cash-starved private sector bank, they said.

    “According to the reconstruction plan, after the capital infusion, LIC will own a little more than 1% stake in Yes Bank. SBI may hold close to 49% in Yes Bank as a part of the recapitalization plan. So, the total holding by government-owned entities will already be about 50%," said one of the persons mentioned above, requesting anonymity.

    “It anyway does not make sense for LIC to buy only a few hundred shares in any entity but, in this case, had LIC bought even a few hundred shares in Yes Bank, the total government holding would have become 51% or more... This would have required some legislative changes and could have delayed and complicated the reconstruction process. SBI has its own issues to deal with and LIC too has 51% in IDBI Bank, in which a reconstruction process is already on," said the person.

    “If SBI curbs its holding in Yes Bank in future, subject to the capping of 26% for three years, LIC may find a headroom to invest in the bank. It will be purely an investment decision for benefiting policyholders and not for any kind of bailout," said the person.

    “Had Yes Bank become a PSU the government may be forced to capitalize the bank whenever there is a crisis in future.Yes Bank already has capital issues and piles of bad loans," said the second person.

    In August 2018, LIC was brought in by the government to rescue IDBI Bank Ltd. The insurer picked up 51% in the public sector bank for 21,624 crore. The money was used to compensate for the lender’s losses and improve the capital adequacy levels to help it stay afloat. Later in 2018, the Congress had accused the Centre of putting pressure on LIC and SBI to bail out debt-ridden Infrastructure Leasing and Financial Services Ltd (IL&FS). LIC is IL&FS’s single largest owner with 25.34%.

    On 13 March, when the government approved a rescue plan for Yes Bank backed by SBI, LIC’s name was missing. On 14 March, Yes Bank wrote to bourses that SBI, Housing Development Finance Corp. Ltd, ICICI Bank Ltd, Kotak Mahindra Bank Ltd, Bandhan Bank Ltd, Federal Bank Ltd and IDFC First Bank Ltd made an equity commitment of at least 10,000 crore.

    Most of the capital being infused by SBI and other private sector lenders will be used for repairing Yes Bank’s books.

    On 14 March, Yes Bank reported a record loss of 18,564 crore for the December quarter, because of the sharp jump in bad loans and higher provisioning. Its gross non-performing assets in absolute terms jumped nearly eightfold to 40,709 crore in the December quarter.

    If the rescue plan works and Yes Bank’s shares gain, SBI and other investor banks may get a comfortable exit but only after three years, as the government has imposed a lock-in of three years on a major part of the investments made by these banks.

    LIC, thus, seems to have escaped a lock-in of its investment. However, it may have to worry about its other investments, which were used to bail out initial public offerings (IPOs) of public sector firms.

    In September, LIC helped the IPO of state-run Garden Reach Shipbuilders and Engineers Ltd. The 345-crore IPO had to be extended and its price band revised because of poor market response. The government sold 25.5% of its 74.5% stake in the firm and LIC picked up 7.33% of it.

    During FY18 and FY19, IPOs of five state-owned firms, all of which received lukewarm market response—Hindustan Aeronautics Ltd, New India Assurance Co. Ltd, Mishra Dhatu Nigam Ltd, Bharat Dynamics Ltd, and General Insurance Corporation of India—were bailed out by LIC.

    These five firms raised around 26,460 crore through IPOs. LIC alone bought shares worth 14,520 crore in these issues. So nearly 55% of the money raised by the government by selling stakes in these firms came from LIC.

    Earlier in 2016, LIC helped the government by extending soft loans to Indian Railways, subscribing to the power sector’s Ujwal Discom Assurance Yojana bonds, investing in the proposed National Investment and Infrastructure Fund and capitalizing state-run banks, besides actively participating in the government’s disinvestment agenda. The insurer has assets worth about 30 trillion.

    Interestingly, in an interview with Mint in April 2016, Shaktikanta Das, the current Reserve Bank of India governor who was then secretary in the department of economic affairs, had said, “LIC has already committed to railways. We don’t want to create an excess government-related liability for LIC. LIC also has a commitment to its policyholders. They should do a good mix of investments."

    LIC had committed to invest up to 1.5 trillion in the railways over five years, till 2020.

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    ABOUT THE AUTHOR
    Anirudh Laskar
    Anirudh reports on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the corporate and financial services industry. Over the past 17 years, he has covered many beats including banking, NBFCs, aviation, automobile, insurance, markets, SEBI, IRDAI, mutual funds, investment banking, private equity, deals, and conglomerates.
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    Published: 16 Mar 2020, 12:39 AM IST
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