LIC could be Pranab Babu's white knight in disinvestment

By R Jagannathan

If the UPA government is looking for a least-bad way to raise Rs 40,000 crore this year from disinvestment or by milking the public sector in other ways (buybacks, hefty dividends), here is one way of doing it painlessly: ask the Life Insurance Corporation (LIC) for the money.

LIC is one of India’s biggest stock market investors, and last year (2010-11) it had invested Rs 43,000 crore in stocks out of a total investible corpus of Rs 1,95,000 crore, according to Business Standard .

While the funds available for equity investment this year are said to be much lower, India’s flagship insurer is said to be earmarking Rs 10,000 crore for buying the shares held by SUUTI - the Special Undertaking of UTI. SUUTI holds Rs 33,000 crore worth of shares, including Larsen & Toubro, Axis Bank and ITC Ltd. Its holdings amount to 8.27 percent, 23.58 percent and 11.54 percent in these companies respectively.

The government has worked out a convoluted plan under which SUUTI will be converted into a fund first, after which the shares held by it will be pledged with banks and insurers to raise money. That money is ultimately be used to buy off the public sector shares that the government will disinvest.

A simpler alternative would have been to simply sell L&T, UTI Bank and ITC to the highest bidders, and the government would have got revenues even without disinvestment. After all, these are private sector holdings of SUUTI.

However, this alternative was eschewed for unstated reasons that we can guess. Selling off L&T would have destabilised the current professional management there. Selling off ITC would have attracted the international players - including BAT Industries - something that the current ITC management does not want. And selling off Axis would have privatised India’s third largest new-generation bank that was once fully in the public sector (It was called UTI Bank earlier).

If direct strategic sales have been ruled out, the next best thing is to offer them to LIC at current market values. Reason: as an entity fully owned by government, LIC is essentially an arm of government.

While LIC’s equity plans this year seem to be lower at about Rs 20,000 crore, acquiring a strategic interest in Axis Bank and ITC may be in line with management thinking. It can easily raise the additional money required to buy off SUUTI.

LIC already owns significant stakes in Oriental Bank of Commerce and Corporation Bank, and adding Axis Bank to the kitty may help since the name of the insurance game now is selling bancassurance (using bank branches to sell policies). At some future date, LIC may also been keen on running its own bank.

Two other ideas for raising money for the exchequer - share buybacks by public sector undertakings and sale of crossholdings - have been frowned upon both by the administrative ministries and the Planning Commission.

In a recent interview to NTDV, Deputy Chairman Montek Singh Ahluwalia said if public sector energy companies have excess cash, they should be using it to grow their business. He said: “My own view is surpluses with public sector companies…particularly since these are mainly in the energy sector…would be much better used to expand investment and capacity in the energy sectors…”.

With all options narrowing, LIC may be the least bad option for government to speed up disinvestment.

Of course, there is always the question of using LIC as your private funding arm. But then, in the case of SUUTI, the government’s aim of raising money quickly and LIC’s own corporate investment objectives may be congruent.

In 2010, LIC alone put in bids for Rs 8,000 crore when the government offered National Mineral Development Corporation shares for sale and no one else was interested. This time too it can play temporary white knight to Pranab Mukherjee’s budget travails.