Government Furthering Own Ends In Raising LIC’s Equity Cap?
DSIJ Intelligence / 22 Nov 2012
According to the latest media reports, the government has announced that Life Insurance Corporation (LIC) of India, the country’s biggest life insurer, can now take up to 30% stake in any listed company from the existing limit of 10%. The new norms would enable the cash-rich LIC, which already invests Rs 50000-60000 crore in equities annually, to pick up higher equity in state-owned companies during the disinvestment process.
The reports said that the LIC was also keen on the stake limit being raised as this would allow the company to invest its surplus cash in the markets and generate good returns. However, one party that is surely unhappy with this move is the Insurance Regulatory and Development Authority (IRDA). The insurance regulator has been insisting that insurance companies stick to the limit of 10% to avert systemic risks.
We believe that the IRDA is right to some extent, as the majority of the income of insurance companies comes from individuals paying premiums for their policies. Investing this money in equities, which is considered as a relatively risky asset class, could prove costly. Further, it is not clear why the government has increased the limit by a whopping 200% (i.e. from 10%-30%) in a single leap. If government wished the LIC to invest more in the market, it could have gradually increased the limit over a period of time.
It appears that the government is acting selfishly on its part. To curb the widening fiscal deficit, it has to achieve its divestment plan and aid cash inflow at the centre. In the Union Budget 2012-13, the government had proposed to raise Rs 30000 crore from the stake sell of PSUs. However, it has not divested any PSU till date. Its plans to achieve the target in the remaining 4 months of this fiscal, which frankly looks quite difficult. In the past, plans to list Rashtriya Ispat Nigam were dropped after there were disagreements between the government and investment bankers on the pricing front.
The government wishes to sell the stake at a lucrative price to meet its targets, but is not able to do so due to volatile market conditions. Further, if it comes up with prices that the market considers as on the higher band, it gets a very lukewarm response from investors and the issue gets under-subscribed. In this situation, at the last hour of trade, it enlists the help of LIC, which invests in the counter in what seems like a last-ditch attempt to salvage the offer. Readers may recollect that this was what probably happened in case of the ONGC FPO in the last financial year.
The news of the government raising the cap limit and of its aggressive disinvestment plans came in on the same day. It now plans to divest 4% stake in Hindustan Copper on November 23 (Friday). It is being said that the government is going for a partial disinvestment as of now (Tranche 1) and plans to divest another 4.59% (Tranche 2) later in the financial year. The current market price of Hindustan Copper is Rs 239.20 per share, but market consensus suggests that the floor price may be set at around Rs 150 per share (this would be set after market hours today). We could see high volatility in the share price of Hindustan Copper in today's trading session.
If the government goes ahead with the divestment of stake in Hindustan Copper on November 23 with the current market price of Rs 239 per share, investors may wonder as to why they should subscribe when the fair value of the scrip could be around Rs 150. This may result in a lukewarm response for the offer. If that happens, will government take the help of the LIC to go through with offer yet again?
Though we, at DSIJ, are of the opinion that the incremental limit is a good option as we may see more money flowing into the equity markets, we also feel that using the LIC to save face is not the right approach. The decision about which scrips to invest in should be left to the LIC, and it should not invest merely to help the government meet its divestment targets.
The reports said that the LIC was also keen on the stake limit being raised as this would allow the company to invest its surplus cash in the markets and generate good returns. However, one party that is surely unhappy with this move is the Insurance Regulatory and Development Authority (IRDA). The insurance regulator has been insisting that insurance companies stick to the limit of 10% to avert systemic risks.
We believe that the IRDA is right to some extent, as the majority of the income of insurance companies comes from individuals paying premiums for their policies. Investing this money in equities, which is considered as a relatively risky asset class, could prove costly. Further, it is not clear why the government has increased the limit by a whopping 200% (i.e. from 10%-30%) in a single leap. If government wished the LIC to invest more in the market, it could have gradually increased the limit over a period of time.
It appears that the government is acting selfishly on its part. To curb the widening fiscal deficit, it has to achieve its divestment plan and aid cash inflow at the centre. In the Union Budget 2012-13, the government had proposed to raise Rs 30000 crore from the stake sell of PSUs. However, it has not divested any PSU till date. Its plans to achieve the target in the remaining 4 months of this fiscal, which frankly looks quite difficult. In the past, plans to list Rashtriya Ispat Nigam were dropped after there were disagreements between the government and investment bankers on the pricing front.
The government wishes to sell the stake at a lucrative price to meet its targets, but is not able to do so due to volatile market conditions. Further, if it comes up with prices that the market considers as on the higher band, it gets a very lukewarm response from investors and the issue gets under-subscribed. In this situation, at the last hour of trade, it enlists the help of LIC, which invests in the counter in what seems like a last-ditch attempt to salvage the offer. Readers may recollect that this was what probably happened in case of the ONGC FPO in the last financial year.
The news of the government raising the cap limit and of its aggressive disinvestment plans came in on the same day. It now plans to divest 4% stake in Hindustan Copper on November 23 (Friday). It is being said that the government is going for a partial disinvestment as of now (Tranche 1) and plans to divest another 4.59% (Tranche 2) later in the financial year. The current market price of Hindustan Copper is Rs 239.20 per share, but market consensus suggests that the floor price may be set at around Rs 150 per share (this would be set after market hours today). We could see high volatility in the share price of Hindustan Copper in today's trading session.
If the government goes ahead with the divestment of stake in Hindustan Copper on November 23 with the current market price of Rs 239 per share, investors may wonder as to why they should subscribe when the fair value of the scrip could be around Rs 150. This may result in a lukewarm response for the offer. If that happens, will government take the help of the LIC to go through with offer yet again?
Though we, at DSIJ, are of the opinion that the incremental limit is a good option as we may see more money flowing into the equity markets, we also feel that using the LIC to save face is not the right approach. The decision about which scrips to invest in should be left to the LIC, and it should not invest merely to help the government meet its divestment targets.
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