A fresh tussle between the government and a regulator has burst out into the open, with the finance ministry allowing Life Insurance Corporation (LIC) to own up to 25% of a listed company over the objections of sector watchdog IRDA, which has blasted the decision.
The enhanced limit could herald good news for the struggling disinvestment programme as the finance ministry could lean on state-run LIC, the largest insurer, to deploy its funds to buy hefty stakes in public sector companies that the government may find hard to sell in the open market.
A senior finance ministry official said recently the government had acceded to the insurer’s request to raise the investment limit from the IRDA-mandated 10% to 25%.
The official said the IRDA ceiling did not apply to LIC as it was governed by a different set of rules than the rest of the industry.
“We have taken this decision only after exhaustive consultation with the law ministry and we feel there is no legal concern,” the ministry official told ET, adding that the government had informed IRDA of the proposed changes.
The government plans to formalise the change by way of a gazette notification under Section 43(2) of the Insurance Act of 1938, which allows it to set rules for LIC. Other insurance companies are governed by the IRDA Act of 1999.
The Insurance Regulatory & Developmental Authority, which had in 2008 amended investment norms to prohibit an insurer from holding more than a 10% stake in a company, openly criticised the government’s decision, with Chairman J Hari Narayan saying it was against prudence.
“It is against the (IRDA) Act and against any prudence,” he said, adding the regulator had advised the government that it was unwise to increase the risk of LIC.
“They said they have taken opinion from the law ministry, but we have asked them to take a second look.They have to understand the gravity of the issue and the potential danger…I do not agree with the government,” the IRDA chief said. The latest episode will make it the second time in recent weeks that tensions have erupted between the finance ministry and financial sector regulators.
Last month, the finance minister ticked off the Reserve Bank of India for not cutting interest rates in its monetary policy review.Asked if IRDA would take up the issue at a forum, such as the Financial Stability Development Council, the IRDA chief said: “It is also run by the government.”
IRDA Advised to take ‘Pragmatic View’
While the IRDA chief seethed at the perceived undercutting of the regulator’s authority, a senior official with LIC welcomed the move. “LIC is a state-owned company and will abide by the owner’s decision. We have a strong finance minister, a strong secretary (DK Mittal), but we do not want to be in a fight with the regulator,” the official said, requesting anonymity because of the sensitivity of the matter.
Former LIC chairman SB Mathur, however, urged IRDA to take a ‘pragmatic view’. “You cannot have the same regulations for a company with a Rs 10,000-crore base and (one with) a Rs 13-lakh crore base,” he said. “IRDA will have to take a pragmatic view and it is in the interest of the macro economy that an institution like LIC invests its corpus considering the limited floating stock available.”
Market experts say LIC, which has long sought an increase in the investment limit, could come to the aid of the government by buying large chunks of equity in state-run companies that are slotted for disinvestment this year but are yet to be sold.
More than seven months into the current fiscal year, the government has not been able to execute even a single share sale, with the process encountering obstacles from administrative ministries that are opposed to shares being sold at a steep discount to the book value.
