LIC’s random acts of kindness

Watching the Life Insurance Corporation of India (LIC) in action recently has been like watching a superhero movie. India’s largest domestic institution has been dashing from one situation to another, performing the rescue act.

For much of last year, the behemoth was busy participating in the many shares sales from the Centre. So when the government decided to sell equity stakes in ONGC, NMDC, Nalco, Hindustan Copper and SAIL amid moribund markets, the LIC swooped in to mop up nearly half the shares on offer, while other institutions dragged their feet.

Yes, this could be justified on the premise on blue-chip PSU stocks offered ‘value’, after being beaten down in the market rout. But then, the LIC didn’t stop just with the large and sound public sector firms. It again appeared on the scene, right on cue, when the government sold stakes in the less attractive and fairly illiquid RCF, MMTC and ITDC.

This year, it has gone one step further. Earlier this month, the government placed ₹1,800 crore worth of BHEL stock in a direct block deal with the insurer, never mind that a majority of analysts don’t rate the stock as a buy. But the insurer’s appetite for PSUs still wasn’t satiated. Within a fortnight of the BHEL deal it was queuing up with other anchor investors to buy units in the Centre’s new brainchild- the Central Public Sector Enterprise ETF (exchange traded fund)!

However, it is not just the Centre which has benefited from the LIC’s random acts of kindness in recent times. Many public sector banks, faced with loan write-offs and slower growth this year, have been looking to shore up their capital base to meet regulatory norms. A few have knocked at LIC’s doors and found a ready investor.

Other banks have been looking to LIC to subscribe to subordinated debt, to meet Basel III norms on capital adequacy. These high-yielding bonds are deemed risky by institutions because any capital erosion at the bank is absorbed by the buyer. But LIC has been obliging as ever. It was the first Indian institution to come forward to buy Tier 2 bonds placed by the United Bank of India; one of the most distressed banks in the PSU space.

It is certainly possible to argue that the LIC made each of these investment decisions in a completely bona fide manner. Indeed, in a recent interview, the LIC chairman said that it was not even fair to term these decisions as ‘bailouts’. After all, LIC is a long-term investor and therefore it is perfectly logical for it to buy beaten-down PSU or bank shares.

But the string of recent investments made by LIC certainly flags some risks in the mind of a prudent money manager. One, given the insurer’s propensity to pick up such large stakes in PSUs, what is its aggregate holding today, in each of these companies?

After all, given the sheer size of LIC’s investments, very large holdings in investee companies can impede the institution’s ability to sell its stakes without impacting the price. Two, does LIC adhere to any prudential investment limits on its equity and debt investments? Does it set any internal limits on its aggregate exposure to one issuer?

Three, what are its internal policies to curtail over-exposure to a single sector or theme, like PSUs? And how does it allocate its various random investments to its different schemes? Finally, what is the overall risk to LIC’s investment portfolio and thus to its policyholders, if its PSU and bank bets do fail to pay off over the ‘long term’?

Answers to these questions would certainly silence doubters and reassure investors that the investment committee is acting in their best interests.

But given the lack of disclosures about the insurer’s operations, they aren’t easy to find.

Answers to these questions are readily available if you are an investor with a mutual fund or even the market linked plan of a private insurer. Mutual funds schemes for instance, cannot invest more than 10 per cent of their portfolio in a single stock. They cannot exceed a 25 per cent exposure in a single sector. If they invest in companies belonging to the same promoter group, they need to make separate disclosures on the size of these deals, in their half yearly accounts.

Investors can easily verify all this from the monthly portfolio disclosures as well as half yearly accounts and balance sheets of these firms. And finally, if any investment made by a fund goes bust, it immediately impacts the Net Asset Value on the very same day, as all portfolios are marked to market.

But compared to this, the LIC’s behemoth portfolio is shrouded in opacity. A curious policyholder has no way of checking what its portfolio, stock and sector holdings and exposures are, in any given month. Compared to most other domestic institutions, which make their portfolio public once every month, or at least every quarter, the LIC’s disclosures are restricted to the once-a-year statements in its annual report.

Even if you refer to its latest annual report, you would be hard pressed to find how LIC’s overall portfolio breaks up into sectors and stocks and what the institution bought or sold the past year. And if you are keen to know how LIC allocates its stock and bond holdings across different schemes, forget it.

Now, loyalists may put forth the argument that given its sheer size, LIC’s decision to invest ₹500-1,000 crore in a few PSU offers won’t materially harm its policyholders. Unlike mutual funds aren’t there myriad regulations that require LIC to maintain high capital adequacy and solvency margins? Hasn’t it successfully met its obligations to thousands of policyholders over the years?

But arguments such as this miss the wood for the trees. It is precisely because of its sheer size and the unquestioning trust of its policyholders that the LIC needs to become more transparent and accountable on its investment decisions.

If there was one key learning from the Unit Trust of India’s collapse a decade ago, it was that allowing behemoth institutions to function on ‘trust’ alone, without the accountability or disclosures that go with it, encourages laxity and puts the entire system at risk.

After the collapse of UTI, it is the LIC which is the sole linchpin of the Indian financial system. Numbers from its annual report tell the story. With over 27 crore individual policies in force, the LIC has in its fold over thirteen times the number of investors who have invested in stocks (2 crore) or mutual funds (over 2.5 crore).

The LIC’s total investment portfolio of ₹14.8 lakh crore, is nearly twice the sum (₹8.2 lakh crore) managed by all the mutual funds in India put together.

Sure, this goes to show that LIC is leagues ahead of any other domestic institution in its role as the trusted money manager for the aam aadmi . But isn’t it time that India’s largest domestic institution repaid this faith by being more accountable to these very investors?