With the norms being eased, the cash-rich insurer can now pick up large chunks of PSU shares expected to be put on offer in the coming months. While it has been targeting R30,000 crore from disinvestments in 2011-12, the government has mopped up virtually nothing so far.
Having received a tepid response to the auction for 2G spectrum which fetched it just R9,400 core against an expected Rs 30,000 crore and with the growth in tax revenues sluggish in a slowing economy, the government appears to be pulling out all stops in a bid to rein in the ballooning budget deficit.
The insurance regulator has strongly opposed the ministrys idea, saying it would not be prudent and pointing out that large exposures to individual companies could pose risks to LIC. The Insurance Regulatory and Development Authority (Irda) has also been concerned over any likely negative impact on LIC's financials from its heavy annuity payouts.
For some time now, LIC has been buying stakes in several public sector banks including Bank of India, Punjab National Bank and Dena Bank. LIC also bailed out the government in February 2010 by subscribing to almost half the NTPC issue. The insurer also bought 43 crore shares of ONGC in March this year after investors stayed away from an auction at around R304 apiece. In mid-May this year, Moodys Investors Service downgraded LICs foreign currency rating of to Baa3 from Baa2. Among the reasons for the downgrade was the significant exposure the insurers balance sheet had to domestic sovereign debt relative to its capitalisation.
Companies lined up for divestment this fiscal include NTPC, BHEL, NMDC, Oil India, SAIL, Nalco, MMTC, Hindustan Copper, Power Grid, Engineers India and Neyveli Lignite.
While all these may not hit the market, the auction route will be preferred in a clutch of cases that might go through, enabling institutions like LIC to play a decisive role in carrying out the government's disinvestment agenda. Worried that market sentiments are not strong enough, the government pins hopes on the offer-for-sale route to meet the disinvestment target of Rs 30,000 crore this fiscal.
LIC already holds more than 10% stake in some 78 companies including L&T, Tata Steel, Tata Power, Mahindra & Mahindra, ITC and Hindalco. With the investment ceiling hiked to 30%, LIC can not just retain its current stakes in these companies,but also raise stakes in these and other companies.
As per the IRDA Act, 1999, insurance companies can hold only up to 10% stake in a company. The government can go ahead with its plan to raise the upper limit for LIC investment in companies as Section 18 of Irda Act 1999 states that in matters of policy, its views would prevail over the regulator's. The relevant notification is being issued under Section 43(2) of the Insurance Act of 1938.
The LIC is also keen to invest in fundamentally strong companies in the current market conditions and has strongly backed the finance ministry's move. LIC chairman DK Mehrotra had said recently: At present, there is a lack of headroom in good inevitable companies due to the existing cap. We have spoken to the regulator in this matter and we would be happy if the cap is increased to even 15% or 20%.
LIC has been justifying its 10%-plus stake in companies citing the LIC Act, 1956, according to which the insurer can pick up to 25% stake in companies.
This fiscal, LIC has plans to invest about Rs 50,000 crore in the equity market. In the last fiscal, the insurance behemoth had pumped in Rs 49,960 crore in the share market.
On the other hand, as against the government disinvestment target of Rs 30,000 crore, none of the PSUs have so far hit the market. With only four months left for the financial year to end, the government is hoping to bank on LIC to pick up stakes in the companies that it plans to divest stakes and help it achieve the revised fiscal deficit target of 5.3% of the GDP.