LIC is the government's ATM - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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LIC is the government's ATM 

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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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00:00
 
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

01:20  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


2:10
 
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.

02:40
 
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.

03:30
 
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.

04:00
 
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!

04:40
 
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.

04:55 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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22 Responses to "LIC is the government's ATM"

ambed kr

Dec 10, 2013

long term basis, LIC could definitely benefit through these Investments as those are germs of Indian Companies. LIC should not sleep on these investments but to appoint specialists to study and recommend improvements. Thus LIC as well as stake holders benefit.
Sreedharan

Like 

Syed Zulfiquar Ali Rizvi

Apr 14, 2013

There is no ATM in the world which do not run out of money.The government need to understand LIC is not any ATM when ever they like they can withdraw,government has to focus on improving there financial statement making the NPA to perform and most importantly make every single penny countable.I believe the collapse of LIC will no less then dooms day of the financial system in India.

Like 

amman

Apr 13, 2013

online payment

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MR.LAKHINDRA RAI

Apr 12, 2013

LIC,1400000LAKH,BAJAJALLINZ LIFE INSURANCE AND GOVT ISSUE

Like 

Ashraffaza

Apr 12, 2013

most of the LIC policy holders are very poor, they cannot understand the internal play between The Beurocrates & LIC officials, if the play is overcome the expectation of the people, that may collapse the Indian economy....

Like 

NISHA DAVE

Apr 12, 2013

I THINK YOU START WRITING ON POLITICIANS AND IAS OFFICERS, WITH EQUAL DETAILS, WITH THE "GRACE" OF WHOM THIS COUNTRY IS RUNNING.THAT WOULD ME MORE SCARY THAN WHAT YOU HAVE WRITTEN FOR LIC. IT'S LIKE A NEW BORN BABY IN THE LAP OF MOTHER WHO HAS NO FEAR OF BEING THROWN BY HER. AFTER ALL YOU HAVE TO LEAVE YOUR TRUST WITH SOMEBODY/WITH SOME WHERE.

Like 

NIRAV THAKKAR - SURAT

Apr 7, 2013

THE LIC IS GOVERNED BY LIC ACT 1956 AND ITS INVESTMENTS STRICTLY FOLLOW THE PATTERN PRESCRIBED IN THE ACT.LIC INVESTS ONLY 10% OF ITS YEARLY INVESTIBLE FUND IN EQUITY & 90% IN SECURED GOVT. DEBT INSTRUMENTS.WHEREAS UTI WAS INVESTING ONLY IN EQUITY.SO THERE IS NO CHANCE OF LIC GOING UTI WAY.SECONDLY,OUT OF THIS 10% INVESTMENT IN EQUITY,LIC CAN'T TAKE OVER EXPOSURE IN A SINGLE COMPANY.THIS PRUDENT STRATEGY WILL NEVER ALLOW EROSION OF POLICYHOLDER'S MONEY.
BUT THE GOVT.MUST NOT PLAY WITH PUBLIC MONEY USING POLITICAL PRESSURE ON LIC MANAGEMENT & FORCING IT TO BUY SHARES WHICH LIC THINK TANK DOESN'T WANT TO BUY.

Like 

Sreedharan

Apr 6, 2013

On long term basis, LIC could definitely benefit through these Investments as those are germs of Indian Companies. LIC should not sleep on these investments but to appoint specialists to study and recommend improvements. Thus LIC as well as stake holders benefit.
Sreedharan

Like 

bharat bhushan sharma

Apr 6, 2013

who created lic? of course gov.it is a business venture of gov.if any businessman does such things no one says anything.does it mean some people are trying to malign lic so that its shares tumble.this matter should be investigated.

Like 

Venkatesan

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.

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