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Now, LIC needs a Jeevan Suraksha policy

The life insurer appears to be the government’s preferred white knight. LIC is exposed to a massive chunk of the system’s bad assets. If this doesn’t make it a choice for Asset Reconstruction Company, what will?

The spurt of controversial moves continues unabated. In a new tale, the country’s largest insurer, the LIC, has decided to increase its stake in the debt-ridden lender IDBI Bank. What is the provocation?

Surprisingly the Insurance Regulatory and Development Authority of India (IRDA) worked overtime to allow the Life Insurance Corporation of India (LIC) to pick a majority stake (ie.51 per cent) in IDBI Bank Ltd. Thanks to this shenanigan, IDBI Bank, which is swelling with toxic loans (Gr. NPA Rs.55,600 crore) will get a bailout to recuperate its affluence. Mark it, the bank has been under the prompt corrective action framework of the RBI due to deteriorating financial health.

Currently, the Insurance Laws Act 2015 and the LIC Act 1956 do not allow any insurer, including LIC, to hold more than 15 per cent in any company. Apart from that, Section 35 of the Insurance Act also does not allow a life insurer to acquire or have control in a non-insurance entity. But the IRDA tweaked the rules, indicating that this is one of political patronage. The move is seen as LIC liberating the government yet again in its disinvestment target, following the failure of the Air India sell-off. The fact that LIC has cherry-picked one of the worst performing banks with policyholders’ money is devastating. Industry pundits are not amused.

The lender for an Impoverished Company

LIC will be pumping money from the premiums paid by millions of individual policyholders. While the investment may be small by LIC’s standards, investment decisions depend on the probability of the investment turning out to be a 10 bagger. Here, there is a serious possibility of it turning into a lemon. Given that investments are made using public money, the rationale needs to be comprehensively elucidated.

IDBI Bank isn’t the lone questionable investment. In the past, LIC has bought into several firms such as Vakrangee, Videocon Industries and Gitanjali Gems that went kaput. It has also taken part in every disinvestment programme instigated by the government, salvaging sick state-run companies. Actually, the life insurer appears to be the government’s preferred white knight. It has the highest stake in perhaps the worst of the banks, having participated in capital infusions before. Recently, LIC invested in the preferential issues of Dena Bank and Bank of Maharashtra. Canara Bank, Allahabad Bank, Syndicate Bank and Andhra Bank are in the line to make preferential allotments to LIC. The government-owned insurer already holds significant stakes in 15 banks. These bank shares have a current market value of over Rs 50,000 crore.

Simply put, LIC is exposed to a massive chunk of the system’s bad assets. If this doesn’t make it a choice for Asset Reconstruction Company, what will?

Minimum Governance and Maximum Questions

LIC-IDBI covenant has offered many corporate governance lessons and raised many interrogations.

Leading questions are: How did LIC get the money for its stake in IDBI Bank? Are the funds invested in IDBI Bank sourced from the surplus that should have been returned to policyholders but has now been diverted? When an insurer is taking on so much risk by holding so many bank and public sector shares, isn’t it violating the fundamental norm of prudence and risk? If LIC were a listed company, it would have had to give an explanation to its public shareholders about the rationale behind the decision.

Strictly speaking, any excess money belongs to policyholders and must be returned to them. Moreover, a degree of accountability is imperative since it involves public money. Also, theoretically, LIC’s investment in IDBI Bank breaches the investment mandate approved by the government and regulator. Additionally, the IRDA bent the rules. This is a treacherous precedent.

Focusing on asset turnaround is also the commonsense cornerstone for the contemporary liquidation and resolution procedure. If we consider IDBI Bank to be a stressed asset, then its resolution process contradicts ideas such as transparent market-based solution, free from government intervention, a paradigm shift in governance and risk process. Such investments by LIC are perceived to be made under government pressure.

No more ‘Yogakshemam Vahamyaham’

The deal has been met with raised eyebrows. Critics, analysts and political parties have castigated the decision of the government.
The deal has upstretched fundamental questions. Will the deal negatively affect us? Will the treaty disrupt the process of insurance and indemnification? Will premium paid by us not go towards the funding of policies?

Considering the several investments made by LIC to accomplish government targets, LIC policyholders do seem to be paying ‘bailout premiums’ in addition to their actual premiums. The past performance of the investments made in the public sector banks (PSBs), highlights that there is substantial corrosion in the share value of these banks which may affect the profitability and lucrativeness of the insurer. In the past few years, LIC has been struggling to raise the bonus on the policies.

It should also be noted that no private investor has shown any interest in IDBI bank even though the government has been trying to sell equity for over two years. (Remember the interest of IDBI Bank to acquire the financial services businesses of Shriram Capital and Piramals but did not frutify?) Given the precarious situation of NPA in IDBI Bank, there is infection risk on the policyholders’ precious savings, which will grossly impact the capability of LIC to serve its policyholders. The insurer pays dividends to its shareholders, that is the government, to the tune of Rs.2000 crore every year and it’s unlikely that this will get disrupted if the bank turnaround doesn’t work out, which means the entity to take a hit from poor investment returns will ultimately be the policyholders. For policyholders, poor investment return will reflect in the form of suppressed bonuses.

More than 25 crore policyholders of LIC feel cheated by the LIC-IDBI Bank puzzle. LIC has been the gilt-edged long-term safety net for most of post-independence middle India. “LIC kara lo” is a refrain heard in Indian homes the minute the first salary of the young adult of a family begins to come in. There is public anger when this security of savings comes under threat. They are worried about the safety of their money and worried about this being a precedent to more such toxic asset purchases. Also, they are anxious about poor disclosures that mask real returns and hide the real accumulative impact of a series of such investment decisions by LIC.

The manner in which the insurance behemoth is being employed in rehabilitation exercise of the government, without doubt, Life Insurance Corporation of India has to take Jeevan Suraksha policy from another broker immediately.

Chinese Food for thought

It is interesting to look at how China is tackling the same problem. There is a major move on to de-stress banks and to deleverage them and the Chinese government has taken several steps to recapitalise the banks.

First, there is a focus on recapitalisation through equity and perpetual bond issues that could be convertible into equity at a later date. Second, there is a relaxation of statutory liquidity and cash reserve norms, to enable greater flexibility in lending. Third, there is stronger regulation and oversight over shadow banking and lending to certain sectors. Finally, some banks have been allowed to fail and there have been defaults on bond redemption by the banks, thus spreading the pain among the customers as well. The Chinese government has considered it more vital to restoring the health of banks urgently while allowing investigations to proceed.

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