Time to end the LIC-propped disinvestment charade: Jaitley is fooling no one

Some bad habits of the UPA seem to die hard even after its exit. To keep the fiscal deficit down, both Pranab Mukherjee and P Chidambaram used funds from the Life Insurance Corporation (LIC) to sell public sector shares. Last week’s Coal India disinvestment, which raised Rs 22,557 crore (about half the budgeted amount), was substantially bailed out by LIC. According to The Economic Times, more than Rs 10,000 crore came from LIC, enabling the government to claim the issue was over-subscribed. It was a white lie. Since other big issues such as ONGC are due before the year-end, one can be sure that the public sector insurer will continue to get a call from North Block to do its bit for the fiscal deficit. As we have repeatedly noted, this is nothing but accounting jugglery, with money being transferred from one pocket of the government to another, from LIC to the public exchequer. It cannot be called disinvestment – at least 100 percent. Finance Minister Arun Jaitley should end this charade. It is fooling no one. [caption id=“attachment_2077151” align=“alignleft” width=“380”]  Reuters[/caption] Yes, we know that tax revenues have been sluggish, and every rupee raised from disinvestment helps show a cleaner bottomline. But the remedy cannot always be to dip into LIC’s cash. In fact, as this Business Standard report shows, the LIC has not just bailed out the latest disinvestment, but may have also indirectly helped TCI – The Children’s Investment Fund of the UK – to exit Coal India. In 2012, TCI, upset over the government’s constant interference coal pricing, had sued the Coal India board and the government over a decision relating to the rollback of an announced coal price hike. With 1 percent of the stock, TCI had apparently hoped to make major gains as share prices benefited from the price hike. But once it was clear that the lawsuit would not make much progress, given the government’s overwhelming right to decide coal prices, TCI appears to have made a quite exit – possibly with some help from LIC, hints the newspaper. In a sense, once could say that LIC is not just bailing out the government, but a private investor too – though this cannot be proven. Today, including the latest disinvestment purchase, LIC may be sitting on more than 5 percent of Coal India stock. There is actually a simple remedy for this over-reliance on LIC bailouts each time. Selling a huge chunk of Coal India in one shot can always be a problem since share sales and IPOs tend to get bunched in the second half of the year – but there is no reason why it could not have been sold in four or five tranches all through the year. The Coal India issue, for example, will be followed by several other mega issues, including one for Rs 10,000 crore by HDFC Bank, followed by ONGC and some public sector banks. So, obviously, the market will be impacted if all these issues hit the investor’s pocket at the same time. One way out may be to create a 100 percent government-owned shareholding vehicle to which the shares to be disinvested can be transferred in one go immediately after the budget. This will show up as a debt liability on the government’s books, as the shareholding company will need funds to buy the government’s holdings. But this company can then offload small portions of the shares at convenient times all through the year. This way it will not rock the market, and may even manage to get higher prices if the market suddenly spikes at some time. As and when all the shares get sold, it can repay the loan from the government. By the end of the year, the loans used to finance the purchase of disinvested shares should normally get liquidated, unless the markets get into a prolonged bear phase. In a sense, this is what LIC may actually be doing on behalf of the government. In the second half of last year, LIC was busy selling shares of blue chips, including ONGC , probably in anticipation of its future bailout role. But this is nothing but poor corporate governance, for it is essentially using policy holders’ funds to bail out the government. That nothing has gone wrong so far does not mean nothing ever will go wrong in future. Time for Jaitley to move to saner disinvestment practices where LIC has no role whatsoever.