Why is it LIC's job to bail out Air India's bond issue?
LIC once again being forced to invest on behalf of a cash-strapped government that cannot find funds for the capital requirements of Air India. But who will eventually bail out India's largest life insurer in the end when it needs capital?
Life Insurance Corporation's investment decisions have raised eyebrows in the last four months. Right after bailing out the government's failed ONGC auction, LIC went ahead and bought shares of 14 public sector banks to help recapitalise them. And now it will have to invest in debt-laden Air India, too.
According to this Economic Times report, not only Life Insurance Corporation, but retirement funds of state-owned banks will have to buy into Air India's Rs 7,400 crore bond issue. The non-convertible debentures have a 20-year maturity and carry a slightly higher coupon rate than comparable government securities. But the catch here is that the government wants to dictate the price at which the national carrier will sell its bonds, which will be well below the demand of private investors.
After investing around 55 percent of its total permitted equity investment of Rs 40,000 crore in public-sector undertakings, is LIC once again being forced to invest on behalf of a cash-strapped government that cannot find funds for the capital requirements of Air India? If yes, it is an extremely troubling sign for the the 29 crore policyholders who have put their money in the organisation's policies.
It sure seems like the government is hell bent on milking cash-rich LIC for its own cash craving. As a Firstpost article noted earlier, with the insurer busy buying shares in state-run entities at a time when they are struggling with a host of issues ranging from slowing credit growth and the rising threat of non-performing assets, 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 now the government is nudging LIC to do another ONGC with Air India. Even though Air India is in talks with the government for a higher spread of around 23-50 basis points above the government bond yield, the rates are too low to attract banks or institutions.
By making LIC purchase the bonds, the government is not allowing market forces to determine the price but is essentially indulging in price rigging.
In 2011-2012, the country's insurance be moth invested Rs 1.5 lakh crore, of which Rs 90,000 crore were in debt investments, and around 50 percent of its equity investments were in stocks of state-run firms, which could seriously lower LIC's returns.
But the question is if LIC begins to bail out each and every troubled PSU, who will eventually bail out India's largest life insurer in the end when it needs capital? Obviously, the government. The game would then have come full circle.
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