LIC goes for proactive policy to cover its investment risks

Written by Arun S | New Delhi | Updated: Dec 31 2012, 06:58am hrs
With the finance ministry hiking the investment limit for LIC in a company to 30% from the earlier 10% and following criticism that rules were relaxed to bail out the government's lacklustre disinvestment programme, the public sector insurance giant does not want to take any chances on its investment strategy.

LIC, which is also the country's largest domestic institutional investor, has asked its officials on the boards of companies it has invested in to play a more proactive role as directors especially regarding corporate governance, highly-placed sources told FE.

The concern is that inactive directors could harm the interests of the insurer especially on board decisions that impacts the operation and profitability of target companies. The LIC, so far, has maintained a passive role on the boards of companies, treating its participation more like an investor than an active management partner. The finance ministry also wants LIC to use its investment in companies to improve its overall functioning. "The role of LIC needs to be changed and it should not just be an investor in the market but also one that helps to improve governance in companies," said a finance ministry official.

Last year, the PSU insurer formed a six-member high-level panel (including two of its executive directors, three directors and a government representative) to look into its investments in various companies where it has significant stake-holding. Besides the investment operations and monitoring departments, the company also has a department to assess risks and carry out research in pre and post investment stages. This followed a CBI probe into the role of its top officials in some alleged scams involving LIC officials and irregularities in LIC investments in 2008 and 2009.

Recently, there were reports that the insurer had sold off its holdings in highly-rated stocks such as Mahindra & Mahindra and Larsen & Toubro for a huge profit of R11,000 crore in a bid to channel the returns in the government's disinvestment plan. LIC had also put its money in the recent disinvestment of PSU companies such as Hindustan Copper and NMDC. However, LIC sources said its investment was always based on the potential to earn good returns.

Another incident that seems to have irked the LIC top brass was the competition watchdog CCI imposing a R55.5 crore penalty on the nation's premier stock exchange NSE on whose board LIC has a nominee member as a shareholder.

The CCI had directed NSE to stop its 'predatory pricing policies' after finding it guilty of abusing its dominant market position in currency derivatives trading. Sources said that in an internal note issued by LIC then had advised its nominee director to take NSE to task on the issue.

In such instances, the respective LIC directors need to be more involved in a company's business plans and see if it deviates from best practices or violates any norms, the sources said. Srinivas Kotni, managing partner, Corporate Lexport said, "Nominee directors can always give their consent or dissent on the agenda items of a board meeting. In case they are in a minority (regarding decisions made by the board), they can even request for convening an extra-ordinary general meeting (of shareholders) and put that issue (which they are against) in sharp focus. This is subject however to adherence to the Companies Act parameters and procedures. This is all done to safeguard the interests of the (nominee) company and also that of the company that one like LIC is invested in."

Almost a quarter of LIC's overall equity investments is in banking sector while another 15% is in other state-run companies. Besides L&T (where it was holding 17.7%) and M&M (where it had 12.69%), LIC has significant holdings in companies such as Tata Steel (15%), Tata Power (13.1) and ITC (11.9%), Maruti Suzuki (8.4%), GAIL (7.2%), Reliance Industries (7.7%), ACC (7.4%), ABB (9.5%), Cairn India (5.7%), IDFC (8.2%), IFCI (8.4%) and Tech Mahindra (14%).

Apart from SBI (10.93%), LIC already also has over 10% stake in more than several Public Sector Banks (PSB) including Corporation Bank (25.5%), Syndicate Bank (14.5%), Punjab National Bank (14.1%), Bank of India (13.5%) and Bank of Baroda (12.1%). Last year, LIC had hiked its holding in several PSBs that needed capital, even as the government was handicapped by a huge fiscal deficit and had struggled to infuse the required capital. The insurer had also came to the government's aid in the stake sale of NTPC and ONGC. LIC's investments in the last financial year was over R2 lakh crore. Of this, around R50,000 crore was in equities. It had reportedly pumped in R16,000 crore in equities till October this year.