Life Insurance Corporation of India bought 1.584 crore shares of Punjab National Bank at Rs 1,003.69 each last week. By Friday, the last trading day of the week, the stock slipped to Rs 926, a decline of about 8.4 per cent.
LIC has not been very fortunate in its decision to buy the shares of 12 other public sector banks last week either. The shares which LIC agreed to buy or has already bought, lost between 0.8 per cent and 8.4 per cent of their value.
Big loss
Such mark-to-market losses have cost LIC roughly around Rs 423 crore. Taken together with the price at which it bought the shares of ONGC, the total loss works out to Rs 1,800 crore.
While the latest new premium collection figures are not available, such losses work out to almost 9 per cent of new premium collected by LIC until November 2011.
LIC is confident about its investment in the oil major, the single largest cause of its mark-to-market losses. “We have no regrets about the ONGC issue as we are a long-term investor. The oil company has sound fundamentals,” said an official from LIC.
According to an insurance analyst with a domestic brokerage, these are all ‘safe' investments. “Do you think, ONGC will quote below Rs 300 for ever?” he retorted, adding all these companies had sound fundamentals and there was nothing wrong in giving some ‘premium' to buy these shares in bulk.
However, as Mr Shriram Subramanian, Founder and Managing Director at InGovern Research Services Pvt Ltd, in which Mr Mohandas Pai, the former whole-time director of Infosys and a shareholder activist, is an investor, said, “The larger problem is that LIC is adhering to the dictates of the Government to subscribe to the preferential allotments of PSU banks. Earlier, it was the Government which would recapitalise the shares, but now because of the fiscal deficit, they are pushing LIC to recapitalise the shares. This is not the correct precedent.”
The preferential allotment has skewed LIC's portfolio and would increase the risk of the portfolio, said Mr Subramaniam. “The insurance major is an investor of large resource and not (an investor) of last resort. It being an investor of the ‘last resort' as in the case of ONGC is being replicated here as well,” he added.
Banks are raising funds to meet their Capital Adequacy Ratio, while in the case of ONGC, the Government raised funds by selling five per cent stake in the company to meet its disinvestment target.