LIC is the government's ATM

Apr 1, 2013

In this issue:
» Small savings to see a big rate cut
» PSUs can buy a credit rating for Rs 1?
» To trim the current account, boost exports
» 'Depositors globally should run for the hills': Jim Rogers
» and more....

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When you need cash you rush over to the nearest ATM and withdraw some. So it is but natural that the government would want to do the same too. But what if we were to tell you that the government's ATM is not funded by taxpayer money? Instead by an institution that claims to insure the lives of millions of Indians and offers life-long investment options to as many! As most would have guessed, it goes by the name of Life Insurance Corporation of India or LIC. As per an article in the Economic Times, the government has been relying on LIC every time it is in need of funds. Be it bond sale or equity, LIC has helped it through all.

The insurance company has a huge corpus built by insurance premiums and ULIP funds. The government has been digging into these funds at its discretion to make its asset sales (public sector IPOs, FPOs and bond sales) a success. LIC was the single-largest buyer of government bonds this year. It was also the largest investor for the equity stake sales by the government. Of the total Rs 4,670 bn raised by the government this year, LIC has provided Rs 1,100 bn or 21.4% of the total figure.

The problem is that some of the issues in which the LIC has invested were shunned by the retail investors. Rather than picking up investments on a prudent basis, it was acting more like a knight in shining armor saving the issues of the government. In many cases like the stake sales of Oil and Natural Gas Corporation (ONGC), Steel Authority of India (SAIL), etc, the issues would have not been successful had LIC not stepped in.

This is a matter of concern for the policyholders. The government PSUs do not have the best track records when it comes to functioning. The cashless ones continue to bleed. And the cash rich ones are milked by the government on and off. Therefore acting as the savior and ATM for the government could hurt the investment corpus of LIC. And if that happens it spells danger for the policy holders.

The government has an eerily long history of milking its cash rich PSUs. Remember the US-64 disaster? The country's first mutual fund had collapsed after Unit Trust of India (UTI), took heavy losses on its investments. The era of the 1990s was marked with many incidents of the government milking its cash rich PSUs. We are not saying that LIC would head the US-64 way. But if the riskiness of its investment portfolio keeps increasing at the current rate then the US-64 days cannot be written off.

Do you think that the government is misusing LIC to serve its own interests? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
The telecom sector's woes have been deepening in the recent past. The excessive competition, cancellation of spectrum, high spectrum costs, are just some reasons for this. The situation was not helped by the announcement of penalties by the regulator. It has recently announced steep penalties on outstanding spectrum usage by the operators. Most operators were hit with this penalty. Even those, whose licenses were cancelled last year, were brought into the net of these penalties. The penalties would further hurt the margins and balance sheets of the operators. They would have little choice but to further burden themselves with more debt if penalties like these keep coming their way. Interestingly the highest incidence of the penalty falls on the government owned Bharat Sanchar Nigam Ltd (BSNL). The PSU has to pay the regulator almost Rs 9.5 bn. On one hand the government is strict with the penalties but on the other hand it has always had a soft heart towards bailing out the cash stripped PSUs. Given this attitude we wonder if the tax payers would be made liable for paying this fine.

Data Souce: Financial Express

Interest rates are like double edged swords. A rise in rate suggests higher cost of borrowings. For households this may mean higher equated monthly installments (EMIs) on loans. For investors in stocks this may mean risky exposure to high leverage companies. In times of high inflation, steep interest rates are therefore an additional burden. But a cut in interest rate by the Reserve Bank of India (RBI) is not reason enough to rejoice either! Investors in saving schemes like Senior Citizen Saving Scheme (SCSS), National Saving Certificate (NSC) and Public Provident Fund (PPF) have recently learned it the hard way. Interest rates on each of these saving schemes were cut by 0.1%. Since the rates are linked to the yields of government securities in the previous calendar year, there is room for more cuts. This is even if the central bank pauses rate cuts for some time. As per Economic Times, without any further policy action during the year, investors should brace for rate cuts of 0.3% on NSC and 0.45% on PPFs in coming months. Time to review your asset allocation.

The one worry that is on every Indian's mind is the rising cost of living. Don't you parents and grandparents often recall the times when things were cheap. So much could be bought even with a few paise. And one rupee was worth a lot. But the times have changed. And the value of the rupee has fallen drastically. One rupee has become almost worthless.

But we read something interesting in the financial journal Livemint. It says that a very large public sector undertaking (PSU) recently awarded the mandate for rating its debt instrument to a rating agency. The deal was done for a paltry sum of Re 1. Yes, one rupee! You read it right.

This is not really a new trend. In the recent past, investment bankers too have wooed PSUs for similar offers. And now, it seems the rating agencies have also jumped the bandwagon. What could be the reason? Intense competition it seems. India boasts of six rating agencies. The only other country that has so many is Bangladesh.

Though it is fine to woo clients with big discounts, we believe the quality of the rating should not be compromised at any cost. The 2008 financial crisis and many such other troubles that the world economy is facing could have been averted had international rating agencies been more vigilant and honest.

India's current account deficit (CAD) was expected to be big in the last quarter of 2012. But not this big. The deficit reached US$ $32.6 bn in the third quarter of the fiscal year, equal to 6.7% of GDP - a record. That's up significantly from 5.4% of GDP in the previous quarter and 4.4% in the same quarter a year earlier. India's inability to revive its manufacturing sector, coupled with the global economic downturn, has led to a steady decline in export of manufactured goods. As long as foreign flows continue towards India, the capital account will aid in offsetting the CAD. Any change in this equation will hit overall balance of payments once again. As the Finance Minister mentioned, India will have to keep looking for US$ $75 bn every year to fund its CAD. Imports remain a structural issue and the decision to raise diesel prices is a much-required, even if late, step in the right direction. On the exports side, a boost to manufactured goods by encouraging investments in India is a must. It would also help in creating jobs. Till then, India will have to live with depending on foreign money to fund its domestic demand.

Imagine your bank balance being reduced by 6.75%. And that too, just for depositing money in a bank that has not been very prudent at decision making. Now, despite the bank's fault, the 6.75% tax is levied upon your account to save the bank from shutting down! As ridiculous as it may sound, this is exactly what is happening in Cyprus. The Cyprus government has planned to levy a tax on depositors' bank accounts. The tax rates would be 9.9% for deposits in excess of Euro 100,000 and 6.75% on lower amounts. These taxes are towards raising the necessary bailout funds. This plan has obviously received a lot of flak from people across. So much so that it has even termed as an act of 'corruption'! With this development, legendary inventor Jim Rogers believes that there is nothing else left to do. And that everyone should pretty much 'run for the hills'. He fears the above mentioned development to possibly become a precedent. With bodies such as the European Union and the International Monetary Fund approving such a move, it would not be surprising if other crisis facing nations followed suit. Thankfully, the situation in India is not as bad. Nevertheless, this development can provide us with a basic investment lesson. That of not putting too many eggs in one basket!

In the meanwhile after opening the day on a positive note, Indian equity markets continue to trade in the positive zone. At the time of writing, the Sensex was up by 17 points (0.1%). The other major Asian stock markets have closed the day in the mixed with Japan and Hong Kong leading the losses in the region. However, markets in Taiwan and Korea have closed in the green.

Today's investing mantra
"If you can remember that stocks aren't pieces of paper that gyrate all the time --they are fractional interests in businesses - it all makes sense."- Seth Klarman

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23 Responses to "LIC is the government's ATM"


Apr 2, 2013

Thanks for bringing this up but I believe as a premier institution LIC has certain responsbilities that include suporting the Government's strategic initiatives. Equity investments entitles LIC to control the course of the divested business through nominee directors and I feel they are doing their work well.

I am not sure what was the investment price in SAIL, but for sure the capital appreciation has been handsome since divestment. Is it a bad investment? What is wrong in holding a stake in ONGC, the country's premier O&G business?

You have to support your arguments with more data for readers to apprecaite the rationale based on facts.



Apr 2, 2013

Blasphemy! you will crucified for uttering the following words "the government is misusing LIC to serve its own interests". The government is of the people, by the people and for the people. Therefore the people misuse and not the government.



Apr 2, 2013

I agree. Govt in this matter is acting very unprofessionaly. This deprives LIC to act in the best interests of its policy holders. This is not correct and must be opposed.



Apr 1, 2013

The word bailout is very shocked word and shows poor performance of total machinery which is working for the companies . It is their moral duty to work hard and make the co. And our country strong . Take a strong positive measures to improve the companies strong growth that investors should be always secure with all govt companies . Bailout is not A. WAY

Like (1)


Apr 1, 2013

whenever govt need to support share market lic is lic's investment in equity higher side & making good profit althou return from pol is very low

Like (1)


Apr 1, 2013

yes, the govt has been doing it for far too long.. In fact the idea of disinvestment is not required..

Like (1)


Apr 1, 2013

The situation in Cyprus is far worse. The abnormal size of the banking sector and unwise, and dishonest investments by the bankers have resulted in this. Now the depositors stand to lose nearly 70% of their investments. The Government the IMF and ECB instead of fixing responsibility for the loss are punishing the depositors innocent or otherwise.

Like (1)

Amit Sengupta

Apr 1, 2013

Yes, sadly very true. Its public money and not tax receipts. The Govt must allow LIC to function without any interference. Otherwise, as competition gets tougher, it is very possible that LIC will turn out to be another US64 episode, whereby, having milked the profits, the losses will comfortably be passed on to the public.

Like (1)


Apr 1, 2013

yes, it is true that Govt. is milking LIC. Why F.M can't think of this before asking LIC to invest when ever a company is sinking and ask help from LIC. The Chairman can say no it is public money and I need to protect the policy holders.Why not F.M ask Pvt. companies to invest in sinking companies. What was the necessary for Govt. to allow Pvt. companies to enter in market, instead they should have made LIC still stronger. Unnecessary competition has been introduced and pvt. insurance companies will disappear one day. Like in past before 1956.

Like (1)


Apr 1, 2013

There is no doubt that the LIC is going the UTI way. Economic Times may find out what is the cost and the present market value of PSU shares purchased by the LIC during the last 5 years. People should know the truth.

Like (1)
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