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LIC Investment Mode:SMALL POLICY HOLDERS AT RISK, by Shivaji Sarkar, 22 March 2010 Print E-mail

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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