The big daddy of Indian insurance is gearing up to take the electronic route to capital market investments. According to institutional brokers, Life Insurance Corporation of India (LIC), the biggest domestic buyer of Indian equities, is in the final stages of adopting direct market access (DMA) and has already formed an initial panel of brokers to route its trades.
Institutional traders say the government-owned insurance major has identified around 35 brokerages through whom it will trade using DMA. While DMA will help LIC reduce transaction costs, its will also help avoid any instances of front-running at the broker’s end.
“In another couple of months, LIC will be up and running with DMA, competing with its private sector counterparts,” says a dealer with an LIC empanelled brokerage. “LIC has already identified around 35 brokerages from among its panel that offer DMA,” he adds.DMA, in simple terms, refers to an electronic facility that brokers offer to institutional clients. The facility allows the client to directly access the stock exchange system and place trades without any manual intervention by the broker. The execution of trades through DMA is also much faster compared to a manual order.
The insurance behemoth has been reviewing its investment style for quite some time now and the focus on DMA is another step in that direction. It has been reviewing the research capabilities of its empanelled brokers with an aim of trimming down the number of brokerages.
DMA also helps in cutting costs as the brokerage is almost half of the normal rates. A manual trade through the broker would cost the institutional client around 10-12 paise for every R100 turnover, while for DMA it could be as low as 5-6 paise.
LIC, however, will be among the last insurance majors to embrace DMA. Most of the private sector entities are already using the facility, with some routing nearly half of their trades through DMA. ?Insurance players are looking at DMA as an advantage, not just in terms of cost, but in terms of control on trades,” says Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance, which places 50% of its trade using DMA.
“Going ahead all large brokerages will have to offer DMA. We have around 20 brokers on the panel and nearly 90% offer DMA,” he adds.
LIC is understood to have invested a gross amount of R40,000 crore in equities between April 2011 and October 2011. The life insurer had invested R40,000 crore in equities in 2010-11. The LIC top management has indicated that the public sector life insurer may invest a larger amount in equities this year. However, collections of premiums, under ULIP schemes, have been relatively poor.
The Securities and Exchange Board of India (Sebi) allowed DMA in April 2008 with a view that it will help reduce instances of front-running. According to market estimates, foreign institutional investors (FIIs) use DMA to place nearly 40% of their trades.
Ever since the CBI arrested LIC secretary (investments) Naresh K Chopra in 2010 for allegedly giving loans to private builders after taking bribes, the public sector undertaking has been taking cautious steps while deciding on its capital market approach and investments. For long, LIC stayed away from illiquid stocks and also kept its block/bulk deal activity to the minimum. It also traded mostly through brokerages that were a subsidiary of some public sector entities.