Invest and secure

The Life Insurance Corporation (LIC) of India wants to be allowed to take equity stake of up to 25 per cent in the companies that it invests in. The Insurance Regulatory and Development Authority’s (IRDA) existing norms on prudential investments require that all insurers cap such exposure at 10 per cent of their total fund value or 10 per cent of an investee company’s equity, whichever is lower. There is a case for giving LIC more headroom, through a policy of linking such flexibility to the size of funds managed, although the extent of liberalisation should be pegged at a level lower than the 25 per cent limit sought by it. Given the roughly Rs 200,000 crore of equity assets that it manages – which is more than the sums managed by the entire mutual fund industry in India – LIC is justified in seeking greater leeway in making investments. While its sheer size renders the 10 per cent ceiling computed on the total investible funds an irrelevant criterion, the alternative cap of 10 per cent on the paid-up equity capital of an investee company would be breached in practically every listed stock in the Indian market. Already, LIC, by virtue of its positions built up over many years, has been in breach of the regulator’s investment cap, in terms of percentage of investee companies’ capital.

But any relaxation must be granted in measured doses, with safeguards to make sure it does not get used to the detriment of policymakers. For that, the regulator must insist on much greater transparency and accountability from LIC on its portfolio, investment choices and performance of equity assets. Ultimately, regulatory caps on how much an insurer or mutual fund may invest in individual stocks, business groups or sectors are meant mainly to protect investors against the risks of concentration. The 10 per cent investment limit was imposed only after the dotcom crash of 2000, when many mutual funds lost money investing up to half of their portfolio in one or two technology stocks. These limits also curtail fund managers from misusing their discretionary powers to favour any particular company or group.

Seen against this backdrop, LIC’s current policy of keeping its equity portfolio and investment decisions under wraps cannot continue. If LIC wants special exemptions from prudential investment norms, it has to adopt better disclosure practices and demonstrate to the regulator and the policyholder alike that it is making optimal risk-return trade-offs. This is especially so in the light of its recent record of bailing out the Government whenever the latter has chosen to raise funds from disinvestment. Such rescue acts have raised the question of whether LIC’s investment decisions are dictated more by its policyholders’ interests or the needs of the exchequer. It is up to India’s largest domestic institution to allay these apprehensions.