Source: Business Standard
The government is set to relax the equity exposure norms for Life
Insurance Corporation (LIC), the largest institutional investor in the
country, albeit with some riders. A finance ministry official said LIC
would be allowed to increase its exposure to more than 10 per cent in
corporate entities. At present, LIC can invest up to 10 per cent of
capital employed by the investee company, or 10 per cent of the fund
size in a corporate entity, whichever is lower. The capital employed
includes share capital, free reserves and debentures or bonds.
The caveat, however, is the insurance behemoth would have to prune its
book in illiquid stocks and unlisted investments, which constitute
around Rs 5,000 crore, or two per cent of its total equity investment
corpus.
LIC’s total investment corpus stood at nearly Rs 11 lakh crore as on
March 31, 2011, of which 20 per cent, or Rs 2.2 lakh crore, was in
equity. During 2010-11, LIC invested Rs 1.96 lakh crore, of which Rs
43,000 crore was invested in equities. In the current financial year,
the insurer has plans to invest a similar amount in equities.
To be sure, LIC currently has equity stakes more than 10 per cent in
37 listed companies. Three years ago, the insurance regulator, Irda,
proposed bringing down LIC holdings to under 10 per cent in all listed
companies. However, it did not follow up on the proposal, given the
anaemic state of the markets at that time.
There are around 100 listed companies in which LIC currently holds
five to 10 per cent stake. Irda (Insurance Regulatory and
Development
Authority) has already indicated it may relax the debt investment norms
for LIC. The regulator is willing to allow it to invest up to 20 per
cent in debt in a particular company. Currently, LIC’s debt exposure in a
single company is capped at 10 per cent. However, this additional
exposure may be allowed only for exchange-traded debt issues.
According to LIC sources, the equity investment portfolio of the
insurer includes investments in more than 400 unlisted firms and the
book value of such firms is estimated at Rs 1,500 crore.
The important unlisted companies where LIC has significant stakes
include IL& FS, National Stock Exchange, Bombay Stock Exchange and
UTI AMC. The directive, if it comes through, would mean LIC would have
to come out of these investments over a period of time.
Besides, the ministry is of the opinion LIC's exposure in these
companies (unlisted and illiquid stocks) is more than “desirable” and
will have to be brought down to “comfortable” levels, not more than Rs
1,000 crore.
"Most of these investments, particularly the unlisted ones, are very
old and have generated a significant value. So, it will not be difficult
to come out of these investments. It should be brought down over a
period of time, since most of it is policyholders’ money.
In the first phase, it should be brought down to Rs 1,000 crore of the total equity corpus,” the official added.
When contacted, a senior LIC official said the insurer had already
initiated the process to prune illiquid stocks from its equity portfolio
and unlock some of the longstanding unlisted investments. However, he
added LIC was yet to receive any official intimation from the ministry
in that regard.
"We have been demanding the relaxation in the equity exposure norms
for a long time. Though we have been getting some indications the
government is considering it, we are yet to get any official
intimation,” the LIC official said. “We are aware of the ministry stance
and we have been pruning our unlisted and illiquid exposure and trying
to book some returns, whenever possible.”
In the current financial year, LIC knocked off more than 60 illiquid
scrips and came out of certain unlisted investments as well, he said.
"Nearly 60 per cent of the stocks trading in BSE are illiquid, and
since these involve policyholders' money, we have always been very
selective about investing in stocks. All these have led to concentration
of holdings in some companies,” he said.
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