During the week, IRDA approved the acquisition of the government stake in IDBI Bank by the LIC. While it is being painted as a strategic investment by the government, it is obviously an attempt to bridge the divestment target. That is understandable. But the problem is that it’s not the only instance of LIC being milked. There have been a series of cases in the last few months when LIC has almost become the investor of the last resort for government borrowing and equity programs. Consider a few classic instances.
How LIC is bailing out
The story of LIC bailing out government spending started about 3 years back in the Union Budget when the LIC was called upon to bail out the Indian Railway bonds. In fact LIC will be sinking in more than Rs.1 trillion to take a stake in bonds issued by the Indian Railways. In the recent past, the LIC has bailed out most of the PSU IPOs. It started with BHEL, which did not get response in the market. Later, the two major PSU insurers were also about to bomb when LIC was asked to come in a bail out the issue. Now we have the case of IDBI Bank! This is a bank with reported gross NPAs in excess of 25% and is also embroiled in a couple of cases where loans were given to undeserving candidates. It is hard to see what synergies that LIC can actually derive from this merger. It will surely put a huge strain on LIC.
A huge PSU portfolio
At a time when the PSUs have been grossly underperforming, LIC has been asked to aggressively add on to its PSU portfolio. LIC’s portfolio of PSU stocks is more than Rs.90,000 crore and it is already sitting on notional losses on these investments. Then there is also the possibility of the government asking LIC to pick up its 24% stake in Air India and divesting the balance 76%. For the government it may hit two birds with one stone. The stake sale becomes attractive and it still retains indirect control. But the pressure on LIC could be huge considering that Air India has massive accumulated losses and a debt pile of Rs.50,000 crore. Things could get a lot worse if the government does not find buyers for Air India and LIC has to bail it out.
Spare policyholders please
There is a fundamental difference between an insurance company and other industries. Insurance companies normally have a small capital base as they run on policyholder’s funds. The government must be a little more careful about making LIC an investor of last resort. The savings and earnings of crores of investors across India are at stake here. This business of LIC was built on the back of trust and faith. Dumping shares on LIC is not doing any service to that public trust. It is better not to put that trust on trial!
