Economic Highlights
New
Delhi, 22 March 2010
LIC Investment Mode
SMALL POLICY
HOLDERS AT RISK
By Shivaji Sarkar
The government’s plan of collecting Rs 40,000 crore
from the market through disinvestment of shares of public sector
companies has not only entered into a rough patch but has put the small policy
holders at great risk. There are few takers for government initial public
offers (IPO). These have virtually been rescued by government financial
institutions. This raises other questions, including whether it is a viable
option or not.
The private insurance companies are wary of putting large
bids in initial offers. A fall in price of the scrip dips not only into their
profits but even the basic capital. On the contrary LIC has been investing in
such initial offers of public sector companies by dipping into its traditional
life fund.
The LIC has invested close to Rs 60,000 crore in equity in
the current fiscal. It is likely to pump in another Rs 7,000 crore to Rs 8,000
crore. Equity will account for nearly one-third of the total
investments of Rs 200,000 crore by the Corporation this fiscal. It has
total assets of Rs 10,000,000 crore. This simply means that the money of the
insurer has been put to a great risk. This is what the Unit Trust of India had
done at the height of the Harshad Mehta share scam, which saw small investors
lose Rs 64,000 crore.
Three recent PSU issues – NMDC, REC and NTPC – fared badly
in the market. There were hardly any takers for the issues. It is a different
debate whether the government should adopt this route or not. The companies are
profit-making and rated high within the government. Even the market perception
is that they are well-managed profit-making entities. The policy formulators
had expected that the renewed activity at the stock exchange would be
favourable for the launch of the public sector issues.
Considering the market conditions, not many had been hopeful
that public sector equities would make a great mark. It is a devious way to
raise finances for the government. Though it has raised finances for the
government, which can show gains in its books, in effect it has tremendously
compromised with the savings of the public. This apart it raises ethical
questions.
As the share prices are bound to dip in the secondary
trading, the LIC and similar institutions are bound to lose thousands of
crores. It would result in poorer bonus (interest) accumulation per policy.
This would imply that the poor investors would be losing heavily to meet the
obligation of the government institutions. In other words, it could be said
that investors are being taxed to meet the shortfall of the government!
To put it in a different way the government is eating into
the institutional finance to show that it was borrowing less. The reality is
that borrowings – fiscal deficit - are bound to increase stressing
further the banking and financial sector and is likely to have a telling effect
on the interest regime and the price situation, which is becoming
critical if a recent statement of the Planning Commission Deputy Chairman,
Montek Singh Ahluwalia, is to be believed.
It was this misplaced faith in the stock market system that
remains uncertain. Domestic players are playing too safe. The small individual
investors having burnt their fingers in the three major scams in the 90s have
not yet been able to muster courage to go back to the stock market. Even the
big players are now cautious. They play in more liquid equities and feel that
the public sector despite its improved performance during the last decade is
not exactly what they look for in quick profits.
The Public sector’s clean performance is also considered a
bad share market asset. Many private sector companies have a different
reputation. They not only launch their issues but also remain active players to
decide the price of their scrip, often in league with the brokers. This makes
their issues attractive to the few investors who are in the market for quick
profit taking. And, this is precisely how foreign institutional investors (FII)
are making a quick buck by investing $ 64 million – Rs 4307 crore - in four
days after the presentation of the Union Budget.
According to the SEBI, the FII funds saw a net outflow of Rs
1716 crore in January and February. For the past few years local speculators,
traders and investors have taken their cue from FIIs as they continue to hold
sway over the market behaviour. The public sector has always been a less
favourable buy for the FIIs. Even during March, the most popular new issues
were from less known companies such as
Texmo Pipes, Man Infra and ARSS Infra. All these shares were far
oversubscribed.
Compared with this, the performance of the PSU offers were
poor – bids for only 2.52 crore shares came against 11.56 crore shares on
offer. The rest of the demands were met largely by the LIC and some other
government institutions. In other words, the government institutions that hold
funds from the people squandered it away so that the lust of the government
could be fulfilled. This is a risky behavior. The LIC acted as the major
rescuer because of the sizeable funds it has generated from traditional
policies. Investments made out of these funds need not be marked to market on a
daily basis, which is the requirement for unit-linked mutual fund type schemes
– the main resource generators for private companies.
Indeed, all this calls for framing of new rules for the
LIC-type institutions so that they do not have a free hand to squander away
people’s money. It has a cap of about 10 per cent of the capital for equity
exposure. But in large PSUs such as the NTPC and NMDC, the corporation can pump
in hundreds of crores, without breaching that limit.
The LIC and similar other institutions should be debarred
from this practice. Investments in PSU bonds could be safe but when it is
shares, the risk is manifold. The small policy holders must be protected. They
are getting far less in bonus because of the so-called autonomy that LIC has in
making bad investments. Additionally, the government too should not take
recourse to such devious disinvestments for raising the so-called revenue. It
fulfils certain technicalities though in reality it deprives every citizen of
his/her money and it is questionable whether it adds to GDP---INFA
(Copyright, India News and Feature Alliance)
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