Life Insurance Corporation (LIC) has received regulatory forbearance from the government allowing it to breach investment limits set by the insurance regulator.
The relaxation has been allowed largely to enable the corporation to hike stake in public sector banks, sources said. Several bank chairmen said that the corporation was acting as a proxy for the government as the lenders had originally sought funds from the Centre.
Norms prescribed by the Insurance Regulatory and Development Authority (IRDA) require that an insurer should not invest more than 10% of a company’s networth.
Last month, Punjab National Bank said that it would issue shares worth Rs 1,574 crore to LIC and these shares would have a one-year lock-in. As of end-December, LIC already held 8.54% stake in the bank and the proposed investment will increase its stake beyond 10%. Similarly, Dena Bank will hold an extraordinary general meeting next month to issue 5% of its equity capital to LIC, which already holds over 6% in the bank. Syndicate Bank also said that LIC would invest Rs 327 crore in a preferential issue of equity shares.
Other banks in which LIC has agreed to pick up stake recently include Indian Overseas Bank (Rs 302.6 crore), Central Bank of India (Rs 341crore), Punjab & Sind Bank (Rs 100 crore approx). In the case of Central Bank too, LIC would breach the 10% ceiling.
On Friday, the market was rife with speculation that LIC had bought most of the ONGC shares being auctioned by the government in an investment of around Rs 12,000 crore. The numbers could not be corroborated. However, this would not be the first time that LIC is bailing out the government in a disinvestment sale. In 2010, LIC was a major bidder in the government’s sale of PSU shares. Most notable was its bailout of the NMDC public issue where LIC alone bid Rs 8,000 crore.
But there is a flipside to LIC’s filling in as a proxy for the government. Typically, in every sharp fall, LIC would accumulate large chunks of blue chip stocks which would provide the corporation with bargain purchases and, at the same time, support the market. Following recent big-ticket investments in public sector banks and more recently ONGC, the corporation has exhausted a lot of its headroom for secondary market purchases.
Although IRDA has reiterated its stance that LIC should follow investment regulations for life companies, it has never penalized LIC for breaching investment limits. LIC has sought to explain the breaches stating that the limits were separate for the life fund and for various schemes of unit-linked insurance plans.
IRDA The regulator has never clarified whether LIC was correct in its interpretation. Some LIC officials have sought exemption on the grounds that LIC was special as it was governed by its own Act and because of this legislation it could not even meet IRDA’s prescription that a company should have a minimum paid-up capital of Rs 100 crore and, therefore, it should have a different set of rules.
