Shareholders beware: Govt milking LIC

The government’s assault on Life Insurance Corporation (LIC) continues unabated.

According to a report in The Economic Times, more than 50 percent of LIC’s equity investments in the past financial year have been in stocks of state-run companies, which could potentially lower its returns given the various ways the government hobbles the operations of public-sector companies.

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The report says the state-run insurer invested around Rs 22,000 crore, or 55 percent of its total permitted equity investment of Rs 40,000 crore, in public-sector undertakings (PSUs).

Given that in general, public-sector undertakings operate under several restrictions (in the name of ‘social interest’) imposed by the government, which lower their profits, it’s hard to see why the state-run insurer thought it fit to invest more in public-sector companies over private-sector ones. Unless of course, it was ordered to do so.

Who benefits from these investments, then? The government of course.

LIC is not publicly listed, but it has 29 crore insurance policy holders; however, time and again, it seems to put the needs of its only shareholder – the government, which fully owns LIC – over everything else.

And the top priority of the government seems to be to milk as much as it can from LIC to satisfy its own cash cravings. The government should be writing a book on “25 ways to milk profitable undertakings”. It would be a best-seller, especially among similar-minded governments around the world.

Certainly, it has been trying at least more than one way to squeeze out money from LIC, which, in turn, keeps getting rapped by regulators – and market watchers – about its lax prudent investment norms.

Only recently, LIC fell into trouble with the Insurance Regulatory Development Authority after it breached its single-company investment limit. According to insurance regulations, an insurance company cannot purchase more than 10 percent in any company. In the previous quarter, LIC pumped in close to Rs 8,000 crore in several public-sector banks, breaching that limit across banks, this Firstpost report said.

More importantly, questions were also raised about why LIC thought now was the perfect time to invest in banks, which are struggling with a host of issues ranging from slowing credit growth and the rising threat of non-performing assets.

The insurance company has also come under the regulator’s scanner for the composition of its board, which includes the heads of some state-owned financial institutions, as well as for the composition of its investment committee, which includes a government official, according to another Economic Times report.

Given that the insurer is busy hoovering up shares in state-run entities, there is clearly a conflict of interest over what is best for the company and what is best for the government’s stake sales.

And, of course, everyone knows about the ONGC auction fiasco, where LIC stepped in at the last minute and snapped up 4.41 percent stake in the oil giant at a higher-than-market-price of Rs 303 per share.

Of course, LIC is not the only state-run entity that is being abused. In a bid to generate cash, the government has been forcing some state-run companies like ONGC to dole out dividends (obviously, the chief beneficiary is the main promoter - the government). Plus, the government has been thinking of ordering cash-rich PSUs to buy the government’s stake in other PSUs to rake in more moolah for government.

But looting PSUs is not the only job of the government; it also enjoys playing the whimsical high lord in many cases.

In at least one company, minority shareholders are fighting back. The repeated government interference in the pricing of coal frustrated one minority shareholder – UK-based The Children’s Investment Fund (TCI) – of Coal India so much that it initiated legal action against the government.

All this bodes ill for this year’s disinvestment programme. If the government interferes remorselessly in the operations of state-run entities, why will investors be inclined to buy shares of PSUs? Worse-case scenario, it will force LIC to mop up the shares.

A cash-desperate government is shooting itself in the foot by engaging in such financial shenanigans. Potential PSU shareholders, beware.