By R Jagannathan
Why are regulators rushing to help the government when their first job is to protect investors?
Early this year, when Pranab Mukherjee was scrounging around for revenues to finance his gaping budget hole, Sebi rushed in to create a new window for disinvestment called 'offer for sale through stock exchanges." The idea was to let government disinvest without a prospectus - and quickly.
When even this simple trick developed glitches - with the ONGC share sale in March almost failing before Life Insurance Corporation (LIC) rushed in at the nth hour to save the day - Sebi allowed the share sale to go through even though it had failed to gather the requisite amount at the scheduled cutoff time.
Not only this, Sebi turned a blind eye to the fact that LIC - a 100 percent government-owned entity - had been buying ONGC shares even before the share sale opened, almost as if it was its job to keep the markets primed for the issue.
Now, having allowed LIC to tank up on all kinds of public sector shares to bail out the government - including a slew of public sector banks that needed a shot of capital in the last quarter of 2011-12 - another regulator has got into the act.
The Insurance Regulatory and Development Authority (Irda) has woken up to the fact that it cannot allow only LIC to breach the 10 percent shareholding limit for holdings in an individual company or bank. So it is planning to increase the limit for all insurers.
The 10 percent limit is a prudential limit, to ensure that insurers don't invest too much in one company and make huge losses if something goes wrong.
Mint newspaper, quoting Sudhin Roy Chowdhury, Member (Life) at Irda, has confirmed that such a move is afoot, though not only to help LIC. "If the investment cap is increased, it will be for all insurers and not only LIC," he told the newspaper.
To make one crime less of crime, it's best to legalise it for all.
With Rs 2,60,000-and-odd crore already invested in equity and with Rs 40,000-45,000 crore accruing every year for further investment, the LIC needs this relaxation not only for its own sake but because the government may any time ask it to bail out a public sector issue. Tonnes of such issues will be coming up in the coming months to help government fills its empty coffers.
In the last quarter of 2011-12, when many public sector banks had to raise equity to meet capital adequacy norms, the finance ministry asked LIC to step in. It is now stuffed up to its gills with bank stocks.
Last year, it bought preferential issues made by as many as eight banks, including Punjab National Bank, Punjab & Sind Bank, Vijaya Bank, Bank of Maharashtra, IDBI Bank, Dena Bank, Syndicate Bank, and Allahabad Bank.
Since it already holds in its portfolio another dozen bank stocks - including State Bank, Bank of Baroda, Bank of India, ICICI Bank, HDFC Bank, Yes Bank, and many others. It is a co-promoter of Axis Bank (formerly UTI Bank), and holds strategic stakes in Oriental Bank of Commerce and Corporation Bank.
If the LIC's shareholdings in various banks were consolidated into one bank, it could give the State Bank of India a run for its money in terms of size and market value.
However, that is not what the LIC's bank holdings are all about. They are about transferring money from one pocket to another, from LIC to a bankrupt government.
One wonders why Irda, whose job is to protect policyholders and not to bail out cash-strapped governments, is playing along with this imprudence.