This is how LIC is bailing out government...

Feb 7, 2015

In this issue:
» Dr Rajan's view on Indian banking system
» The world is submerged in pile of debt
» A weekly overview of world stock markets
» ...and more!

  Chart of the day
In the western world, central banks are bailing out governments by following a near zero monetary policy ignoring the ills it could inflict on economies in the long run. However, in India we have a sane governor by the name of Dr Rajan who maintains objectivity and refuses to get influenced by anyone.

However, this does not mean that the Indian government is pariah and left to fend on its own. It has its own white knight, known by the name of LIC. And the beauty is since this insurance saviour is neatly camouflaged Indian government escapes the criticism that western governments generally attract for manoeuvring their central bank policies.

Let us see how government is literally using LIC to bail itself out as far as meeting its fiscal targets is concerned. We know that government is incapable of meeting its fiscal targets by following traditional methods like increasing revenues and cutting back expenditure. Hence, it has resorted to disinvestments which bring in a temporary windfall. But the irony is that these disinvestments are virtually bailed out by LIC, another PSU. Basically, the money is transferred from one pocket to another.

Take a look at today's chart and you will get to know how government is literally milking LIC for its own benefit. As seen, out of all the PSU disinvestments that have concluded recently LIC has been the biggest buyer.

LIC is the largest buyer in PSU disinvestments

In fact, in some disinvestments like SAIL and ONGC the share of LIC is as high as 71% and 84% respectively. Basically, under the name of disinvestment, government is transferring its stake in PSUs to an unlisted insurer which is ironically owned by it only!

It is anybody's guess if LIC would have autonomously increased its stake in these PSUs had it not been a government institution. While LIC's investment in these share sales could be miniscule of its total investible surplus it is important to note how government is arm twisting the insurer to make its share sale plans successful.

Again, from the point of view of LIC such investments do not make much sense. For one, we know that PSUs do not have the best track records. Hence, owning them is fraught with risk. Secondly, buying them at price that government deems fit seems illogical too.

Now one may argue that considering LIC's corpus, these investments in PSUs, are like a drop in the ocean. Thus, they do not present substantial risk to policyholders. But this does not give government the right as well to overlook policyholders' interest and direct LIC to make coerced investments.

The fact is that government is so much dependent on LIC to fill its coffers that it cannot afford to make do without it. Don't believe us? Then fathom this. As per IRDA regulations any insurer cannot hold more than 10% equity capital of any company. However, government relaxed this rule for LIC and raised the limit to 30% in 2012! This says it all.

We reckon this milking shall happen till all PSUs are privatized and government has nothing to offload. The million dollar question then would be - How will the government fund its shortfall?

Do you think LIC is at risk by making investment in PSUs at the behest of government? Let us know your comments or share your views in the Equitymaster Club.

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Just yesterday we wrote about how mutual funds have a disproportionately high exposure to financial sector stocks. Earlier too we have warned you against joining the party of overvalued banking and financial sector stocks. And the prime reason being that the quality of assets in the sector has shown no sign of improvement over the past few quarters. Meanwhile, the average valuations have gone up several times.

Now if you are wondering if the Indian financial sector is subject to systemic risks, your worries are misplaced. None other than RBI governor Dr Rajan has acknowledged the fact that most of the NPA malice lies in the PSU banks. And that the government backing for these entities will ensure that depositors do not lose money. We agree with him. But does that mean even the shareholders of all PSU banks are assured of returns? Well, that is definitely not going to be the case. While the safety of deposits is reasonable assured, unless the PSU banks can improve the quality of assets in their books, they are unlikely to make profits. Therefore, needless to say, shareholders are unlikely to fetch returns. So while Dr Rajan's assurance that India's banking sector is not at the brink of a collapse is true, investors in banking stocks must be wary of valuations.

It has been 6 years since the global financial crisis wreaked havoc on major economies across the world. Easy money policies and an environment of low interest rates had led to the creation of bubbles and accumulation of debt, which finally led to the subprime crisis in the US in 2007-08. But have any of these economies learnt anything from this crisis? Not really. Indeed, most central bankers of the developed world have tried to solve the problem of excess debt through money printing. This has only exacerbated debt levels further. As reported in an article in the Economic Times, since the start of the global financial crisis at the end of 2007, the total debt worldwide has risen by US$ 57 trillion, rising to 286% of global economic output from 269%. And it hardly matters what the nature of the debt is. For instance, in Greece and Italy debts are heavily owed by the government. While in countries such as Britain and Ireland, these are largely owed by financial institutions. In Spain, the problem is more of excess household debt. And there is more. Asian giants such as Japan and China are not spared either. Japan, through its radical monetary policies, has accumulated massive debt amounting to around 400% of GDP. China seems to be heading that way too having amassed debt of around 217% of GDP.

Just as too much debt on a company balance sheet will ultimately disrupt its operations or force it into bankruptcy; too much sovereign debt bodes ill on the balance sheets of countries as well. So far, none of the governments or bankers are willing to accept this though.

In the week gone by stock markets of the developed world continued their upward journey on the back of central banks in Europe and Japan following the path of aggressive monetary easing measure to revive their respective economies. The German DAX and the French CAC indices were the top gainers in the week.

Crude oil prices rebounded sharply this week but it's anyone's guess if the rally can be sustained. The US markets remain positive. However, the markets are increasingly worried about the US Fed increasing policy rates in the middle of this year due to improving economic data.

Back home, the Indian markets ended lower on the back of disappointing quarterly earnings and the Reserve Bank of India (RBI) maintaining status quo on the repo rate in its monetary policy review. The RBI though did cut the SLR by 0.5%. The central bank stated that further rate action will be dependent on economic data.

Performance during the week ended February 06, 2015
Source: Yahoo Finance

 Weekend investing mantra
"We look for a horse with one chance in two of winning and which pays you three to one" - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Jinesh Joshi.

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11 Responses to "This is how LIC is bailing out government..."


Feb 11, 2015

The business community and big share brokers think that the promises made before elections are meant for implementing after election. It is not so Before election BJP and Baba Ram DEV proclaimed this much of black money is in Swiss Banks and they will be bringing back and distribute 115 lakhs to every one and they will credit he same in Bank accounts of all Indians Promises are for catching votes
LIC is owned by the government and therefore LIC chairman or investment committee cannot dare to say No to their bosses in Delhi.
The increase in Share prices during the last 10 months is Modi Mania and not based on Fundamentals . With a change in government does not make overnight increase in fundamentals because government . In practice after the present government taking charge all fanatic elements are speaking nonsense. All so called Sadhus and Sanyasis and sanyasins are making statements defying our great constitution against the constitution burning places of worship implementing Nadaks like Ghar Wapasi ,spreading communal venom and the like .Is it the modern VIKAS. Many are busy with making statues and temples for their Hero NRG
Delhi election is a referendum to this Theocratic economy .expect steep fall in share prices soon



Feb 11, 2015

LIC may finally make money on the deals (Government bailout of UTI in the 90's when eventually, the Government made a handsome profit on the bailout) especially given the robust predictions of growth in the next few years. But that is not the only yardstick to judge these decisions. This is patently wrong as these are not "independent decisions" by LIC based on examination of financial and economic issues that indicate what is best for LIC at the time and date of investment. By encouraging such off the books and regulations decisions and arm twisting, we encourage subversion of the systems where individuals think they are greater than the system and rules, which they are loath to defend in a transparent manner.



Feb 8, 2015



chaitanya kirtane

Feb 8, 2015

no LIC is investing prudently in psu shares and making highest profit than any other institution whether DII or FII . last year lic is the bigest profit earner of all . Even in next 5 years LIC will be the most big profit earner in the market because they only know the true value of each PSU.


Jeevan Shetty

Feb 7, 2015

Your views on LIC investments in PSU equity is one sided and inaccurate. Please check how much LIC has benefitted over the years on its investments in PSU units. Further such large investment if LIC attempts in open market will lead to market instability. LIC has a very good track record of investments. For any investor with deep pockets such investments are good strategy.



Feb 7, 2015

Don' t you think that LIC had the last laugh with investment in SBI and other PSBs
When the market was down and investors were lukewarm to the QIPs. With it's long
Horizon perhaps it has the luxury of unloading whenever market shows irrational exhuberance
at a profit


swapan lodh

Feb 7, 2015

in this process lic will become a sick entity which no body will be interested to take over. my worry is if lic shortly face the fate of sharada of west bengal!


Venugopal Ramanathan

Feb 7, 2015

I think we are overreacting a bit here. Just because these are PSUs, we are automatically creating a myth that the money being invested in them is at a greater risk than if invested in a private entity. If we look at the list of companies with the largest market caps, a large number of them are PSUs. So it is only logical that a large entity like LIC will hold a substantial investment in these entities. Surprisingly, large private houses present a greater danger in terms of eroision of wealth due to the irrational and eccentric decisions of their owners. One only has to look at the Tata and Birla companies to see how their eroding. Even a Reliance Industries is finding it tough to keep up to the Sensex growth. Amd there is no proof that LIC is being coerced to do this time and again. And look at the previous buys of LIC in PSUs. All of them are doing quite well. And the final proof is the Goldman Sachs CPSE fund which has outperformed quite a lot of other equity funds.


ajit maiti

Feb 7, 2015

Investment consultants /advisers had recommended to buy the stock for long term. LIC is long term investor as I understand. So it is of no concern with respect to policy holders as their money invested in good scrip on long term basis.



Feb 7, 2015

The article "This is how LIC is bailing out government..." is truly revealing and informative. I pity the Indian public for sincerely paying premiums every year to LIC in the misguided hope that Investments made in various LIC's "Jeevan....." policies will give them astounding returns (so many lakhs or crores of rupees', after so many years), the typical sales pitch of LIC and its crony agents. Unless and until the general public is not well financial educated ( knowning the difference between Assets and Liabilities), there is nothing one can do about it and the Government will keep milking the LIC and keep bailing out governments no matter which party is in power.
The only hope is to propagate financial education to atleast next generation so that they can take informed investment decisions in future.

Y. Mahesh

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