Sunlight needed

Indian banks have been in the news for all the wrong reasons, with a sluggish economy, distressed corporate borrowers and the Reserve Bank of India’s asset quality review, which has triggered sharp profit drops across listed banks this fiscal. But this hasn’t deterred the Life Insurance Corporation of India (LIC) from placing bullish bets on the sector. A BusinessLine analysis shows that the LIC sharply pegged up its investments across public sector bank stocks in FY16, with its equity stakes topping 10 per cent in SBI, PNB and Canara Bank, and nudging the 15 per cent mark in a few others. There is nothing wrong with an institutional investor taking a contrarian bet on a sector when everyone else is fleeing from it. However, LIC’s investment moves have been attracting closer public scrutiny after its participation in one too many pet projects of the Government — from subscribing to disinvestment offers to funding the capex plans of Indian Railways. There is a growing sense of unease among policyholders as to whether LIC’s investment decisions are indeed bona fide.

The insurer’s standard defence against any such criticism has been that it carries out its own due diligence on every investment and sees ‘value’ in public sector stocks as a long-term investor. But as India’s largest domestic institutional investor with mammoth assets of over ₹19 lakh crore, LIC’s investment actions have significant systemic implications for the capital markets. In this context, it is certainly not comforting that LIC, which is governed by a separate Act of Parliament, has found it difficult to adhere to the Insurance Regulatory Development Authority’s (IRDA) prudential norms on investment exposures. Private sector insurers are required to cap their individual equity bets at 15 per cent of the investee firm’s capital or 10 per cent of their own assets under management, whichever is lower. Some of LIC’s legacy investments in banks, though, are in breach of the first norm. Both the regulator and LIC officials have justified this on the count that, as its equity portfolio makes up only a fraction of its investment book, this poses no concentration risk. But this argument plays down both impact costs and significant ripple effect on the markets, should LIC decide to pare down its big banking bets. Indeed, this is why the RBI has also flagged ‘contagion risks’ from the insurer’s equity stakes in banks, in its financial stability reports.

Such fears could be easily allayed if LIC’s equity investment operations were open to public scrutiny like those of its much smaller mutual fund or even private insurance peers. Currently, these operations are a black box, with only sketchy details available in the annual report. Periodic disclosure of its top equity holdings, sector-wise allocations and aggregate exposure to major corporate groups, along with commentary on key investing decisions, would be LIC’s best shot at convincing the investing public that it is not the handmaiden of the Centre that it is often made out to be.

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