LIC Turns Rescuer, Once Again!

Relying on LIC and public sector banks to fund the Government’s stake sales in public sector corporations is not only bad economics, but also unethical, in that failed investments, they may eventually end up hurting the common man—the policy holder in the case of LIC and the depositor in the case of banks.

In a welfare-oriented economy such as ours, it is not uncommon for governments to resort to stake sales in public sector units (PSUs) in order to help meet annual fiscal deficit targets. The recent disinvestment programme of the BJP-led NDA government in Steel Authority of India Ltd (SAIL) is one such example. It is aimed not so much at turning around the state-owned company’s operations but as to help raise one-off revenues to narrow down the deficit.

Much to the government’s chagrin, however, this sale demonstrated that most investors still continue to shy away from buying into the public sector story, even as they remain optimistic about the overall state of the economy under the new government.

Both foreign institutional investors as well as domestic mutual funds—two participant entities that strongly influence the stockmarket activity—gave tepid responses to the  SAIL disinvestment programme. Despite poor investor interest, however, the issue managed to get oversubscribed by as much as 207 per cent. This was mainly on account of investment from public sector entities, which bought 55 per cent of the shares on offer.

Of those entities, Life Corporation of India (LIC) alone purchased a staggering 40 per cent stake, an act which should raise several questions.

Given that LIC is fully owned by the government, was the decision to buy a significant portion of the stake in SAIL based on independent judgement?

Even if we assume it was, wouldn’t it be both prudent and ethical on the part of the government to maintain a cap on the amount invested by one state-owned institution in another state-owned company? After all, by doing so, it could potentially preempt even the appearance of foul play in the eyes of the general public.

If major private institutional investors, both foreign and domestic, do not buy into the SAIL growth story, then how is it that LIC found the company so valuable as to buy a majority of the stake sale? After all, private investors are generally known to perform far more rigorous due diligence than government companies. And if these investors failed to see long-term value in the company, then LIC perhaps needs to explain to policyholders the rationale behind its decision.

Investments ought to be made with a view of earning the best returns to capital. Which begs the question: what if LICs massive investments in public sector units, many of which are hardly recommended by mainstream analysts, perform poorly in the longer run? Specifically, what are the risks to policyholders in the case of failed investments?

Add to these questions the fact that LIC has historically bailed out several disinvestment programmes of the UPA government, owing to a lack of investor interest in them. In November 2012, for example, the share sale of Hindustan Copper romped through mainly on account of a major investment by LIC and public sector banks combined. That this was a rescue act was evident in the fact that the issue received bids amounting to a piffling Rs 31 crore—of a total of Rs 800 crore eventually received—in the first three hours. Only in the last 30 minutes did majority of the bids happen and the issue, after having struggled to garner interest, finally got fully subscribed.

Like in the case of the recent SAIL disinvestment, Hindustan Copper had garnered muted response from foreign institutions and Indian mutual funds alike, even though the sale offer was made at a steep discount of 41 per cent to the then prevailing market price of Rs. 266.

Some months earlier, in March 2012, the UPA government had attempted to sell stakes in ONGC. This issue too, not surprisingly, had stumbled for the lack of investor interest. The insurance major eventually had to come to the rescue by contributing Rs 11,500 crore of the total of Rs 12,767 crore that was raised through the issue. It was after learning from this embarrassing experience that the government decided to provide a steep discount in the Hindustan Copper share sale which was to follow in November.

Now, one could argue that LIC had indeed seen value in these companies before investing hefty amounts in them. That these were bona fide decisions made on genuine, blue-chip PSU stocks. But what explains the insurance major’s similar rescue acts in companies such as Rashtriya Chemicals and Fertilizers, India Tourism Development Corp, and Metals and Minerals Trading Corporation of India in 2013? After all, these companies were hardly attractive or even sufficiently liquid back then.

To meet this year’s deficit target of 4.1 per cent, the government has planned to raise Rs 43,425 crore from disinvestments in state-owned companies. After SAIL, it has considered disinvesting in ONGC, Coal India, and also NHPC. Before proceeding with them, the government should get the fundamentals of these companies in order. It should fast-track reforms and give investors a valid, persuasive reason to invest. Relying on LIC and public sector banks to fund its stake sales is not only bad economics, but also unethical, in that failed investments may eventually end up hurting the common man—the policy holder in the case of LIC and the depositor in the case of banks.

More importantly, the Prime Minister should realise that minor disinvestments in public sector companies are not a long-term solution to the problems ailing this economy. Eventually, failing PSUs must be fully privatised and unnecessary social expenditures and populist schemes must be curtailed so to truly rein in fiscal deficit and ensure growth.