Increase in LIC investment cap a short-term positive, say experts

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SummaryEven as the market conditions remain largely conducive, the government is leaving no stone unturned to achieve its 2012-13 divestment target.

Even as the market conditions remain largely conducive, the government is leaving no stone unturned to achieve its 2012-13 divestment target. While it has finalised a list of PSUs, including NMDC, Nalco, Oil India and Hindustan Copper, with which it wants to kickstart its R30,000-crore divestment plan for the fiscal, the finance ministry has issued a notification increasing the investment ceiling of the Life Insurance Corporation of India (LIC), the biggest domestic institutional investor in Indian equities, into a single company.

According to financial services secretary DK Mittal, LIC can invest upto 30% of a company’s paid-up capital against earlier 10%.

Market observers cite the measure as the government’s resort to achieve its divestment target in order to manage country’s fiscal deficit that has remained a major concern for the global investors.

As per Vikas Khemani, president and head- institutional equities with Edelweiss Securities, even as the the step reasserts the policy makers’ commitment in achieving its fiscal deficit targets, it may not impact the market sentiment significantly. “It may be regarded symbolically negative because it is would not be a conventional divestment process,” he added.

Although the government had pegged fiscal deficit for the current fiscal at 5.1% of the GDP in the Budget, it has revised the target to 5.3% due to subdued revenue collection and rising fuel and food subsidy bills. In wake of these limitations, it is estimated that India may miss its fiscal deficit target. In 2011-12, the fiscal deficit stood at 5.8% of the GDP.

“This may be a short-term pluses and a long-term negatives,” said Sanjay Sakhuja, CEO, Ambit Corporate Finance. “LIC is a long-term and stable investor, so from a company’s perspective an entity will not be able get a more diversified investor share in its shareholding,” he added.

According to estimates, the move is likely to authorise cash-rich LIC to invest about R50,000 to R60,000 crore so that it is equipped to aid the divestment process. “This is an enabling clause that will help government achieve its divestment targets,” said the head of a domestic investment bank, who has been involved in divestment issuances. “They already hold more than 10% in a few companies and the notification will only provide them with more flexibility. I, however, do not see any impact on the broader market as such,” he said, wishing not to be named.

There are at least 30 companies in which LIC held more than 11% stake as of September, including seven public sector banks like Syndicate Bank, Punjab National Bank, Bank of India, Union Bank, Bank of Baroda and SBI. It held 25.5% and 18.8% in Corporation bank and MTNL, respectively, shows the data.

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