 "PSU disinvestment: It's time for Jaitley to take his hands out of LIC's pockets")
Bad habits die hard in government, whether it is UPA or NDA. It seems that the Modi government’s disinvestment plans, which include the sale of public sector shares worth more than Rs 60,000 crore in this fiscal year (2014-15), will also use cash-rich Life Insurance Corporation (LIC) as a potential milch-cow just in case the market is not able to absorb its offerings.
The purpose of disinvestment is to raise money for the exchequer by selling stocks to non-government investors, but when there aren’t enough of them around, the government sells the stuff to LIC - which is nothing but an extension of itself - and calls it disinvestment. Bullish conditions may obviate this necessity this year, but the government is obviously not taking any chances and LIC is building a war-chest, just in case.
During the second-half of UPA-2, most disinvestments and public sector bank recapitalisation needs were bailed out by the LIC. Given its huge premium income, the insurer is always rolling in cash. In 2014-15, for example, it will have over Rs 3,00,000 crore to invest, of which Rs 50,000 crore can go into equity.
While this corpus alone will give the LIC the ability to buy lots of public sector stocks in case other investors don’t step up to the plate, the insurer seems to be making doubly sure that it will have even more resources for loading up on public sector equity by offloading its current holdings in a bullish market.
According to this Economic Times report , the government-owned insurer has been selling stocks such as ONGC, ITC, ICICI Bank, Tata Motors and HDFC Bank in recent days, and plans to build an additional war-chest of Rs 15,000-20,000 crore by such sales in order to provide a back-stop to disinvestment offerings.
Taken together with the regular equity allocation of Rs 50,000 crore for 2014-15, LIC’s current portfolio sales will raise the kitty to over Rs 65,000 crore - enough to absorb the entire disinvestment target in one swallow.
The sale of ONGC shares by LIC is interesting, for this oil producer is likely to be one of the first public sector shares to be on the block when disinvestment starts some time in October. Big chunks of ONGC equity were acquired by LIC in the 2012 disinvestment by Pranab Mukherjee, when there were no other takers. The Modi bounce in stocks has enabled LIC to not only recover what seemed a dud investment in 2012, but make a profit and build resources for buying more ONGC shares.
Coal India and SAIL are likely to be two others on the disinvestment list, apart from the National Hydel Power Corporation. ITC, which is likely to be disinvested from the Special Undertaking of UTI, an entity created to pay off investors in the Unit-64 scheme when it hit a financial bump, is something the LIC is overstocked on. As at the end of June, i t has 14.42 percent of ITC , and the recent sales in a bullish market will obviously create space for more purchases.
LIC, which is also overloaded with bank stocks , having played white knight to their capital requirements, is said to be selling blue chips like HDFC Bank and ICICI Bank to tank up on public sector banks, when they come to hawk their equity. With loan scams hitting the headlines regularly ( Syndicate Bank’s bribery case involving Bhushan Steel, and the Oriental Bank and Dena Bank frauds), shares of weak banks are hitting a speedbreaker. Syndicate Bank’s shares, for example, have fallen from a 52-week high of Rs 180 to less than Rs 120 this week. This means the capital requirements of banks in the doghouse may need an LIC bailout.
The tragedy for LIC is that it will be selling blue chips bank stocks and acquiring public sector shares of doubtful pedigree.
In fact, the LIC’s ability to buy left, right and centre has partly been enabled by the stock market bounce that started last year, when institutional investors got wind of the UPA’s impending exit. If we attribute this to the Modi effect, it means that Modi’s election has helped the LIC recover its losses in public sector equity, and his government is now expecting the insurer to stand by and bail out the disinvestment programme, if required.
What a pity that the gains from one bounce have to be recycled to endlessly bail out disinvestment. Arun Jaitley must put a stop to this tendency to shift money from one pocket of the government to the other and calling it disinvestment. He should sell public sector shares to no one but retail and institutional investors. LIC should invest based on its own assessment of a share’s potential. Not because it got a wink and a nod from North Block.