Why LIC Will Continue to Bailout the Govt This Year as Well - Vivek Kaul's Diary
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Why LIC Will Continue to Bailout the Govt This Year as Well

Oct 17, 2018

Vivek Kaul

Every year the government sells some of its holdings in public sector enterprises in order to meet the fiscal deficit target that it sets for itself at the beginning of the financial year. This process is referred to as disinvestment. Fiscal deficit is the difference between what a government earns and what it spends.

The interesting thing is that the government is basically selling an asset to meet its expenditure. In personal life, this is always a bad idea, but it is an excepted form of raising money for the government. The government can do things that individuals can't.

At the beginning of this financial year, the government set a disinvestment target of Rs 80,000 crore for itself. Up until August 2018, the government has managed to raise Rs 9,424 crore. This is around 12% of the annual target.

Last year, by August 2017, the government had managed to raise 13% of the annual target. What this tells us is that the disinvestment of public sector enterprises is typically carried out during the second half of the financial year, by the time the government has a good idea about how well it is doing on the other avenues of collecting revenues.

There are several points that arise here. Let's take a look at them one by one.

1) This year disinvestment proceeds will be very important. A major reason for this lies in the fact that the goods and services tax (GST) collections are unlikely to meet the targeted amount. Central GST is a key component of government revenue. At the time the budget was presented in February earlier this year, the government had hoped to earn Rs 6,03,9000 crore from it.

The trouble is that for the first six months of the financial year between April and September 2018, the total collections have amounted to only Rs 2,15,658 crore. Of course, the second half of the year is the time filled with festivals and people tend to consume more during the festival time and GST is ultimately a tax on consumption. Hence, the government should be able to earn more central GST during the second half of the year than the first.

Nevertheless, in the first six months, only 35.7% of the central GST target has been collected by the government. Despite, the festival season in the second half of the year, the target of Rs 6,03,900 crore is unlikely to be achieved. A gap of more than Rs 50,000 crore is likely.

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2) In this context, disinvestment proceeds become even more important. The trouble is that many a time, the government doesn't carry out genuine disinvestment. Genuine disinvestment refers to selling shares of a public sector enterprise to a private company or selling shares to investors (retail investors, mutual funds, insurance companies etc.)

What it does instead is to get one public sector enterprise to buy a stake in another. Like during the last financial year, the government sold its 51.11% stake in Hindustan Petroleum to Oil and Natural Gas Corporation (ONGC). The company paid Rs 36,915 crore to the government for it. This formed a bulk of the Rs 1,00,000 crore that the government received through the disinvestment route. As I write this, the value of ONGC's investment in Hindustan Petroleum has fallen to Rs 16,137 crore, a fall of more than 56%.

As far as investments go this was a terrible investment. Nevertheless, the question is why does the government adopt this model instead of selling shares to investors. The answer lies in the fact that through this method, the ultimate ownership continues to remain with the government. Whether ONGC holds a stake in Hindustan Petroleum or a government holds direct stake in Hindustan Petroleum, it doesn't really matter, because the ultimate ownership in either case lies with the government.

Hence, by getting a public sector enterprise to pick up a stake in another public sector enterprise, the ultimate stake remains with the government. And given that, the government can sell that stake again. In the years to come, ONGC's stake in Hindustan Petroleum can be sold back again to Hindustan Petroleum. This is just a way of raiding the cash on the books of a public sector enterprise. Of course, this takes the minority shareholders of the company for a ride.

3) The other formula is to get the Life Insurance Corporation (LIC) of India to pick up shares in public sector enterprises, where the investors are not interested. Take the recent case of Garden Reach Shipbuilders and Engineers, a company which builds and repairs commercial and naval vehicles. The IPO of the company did not find many buyers, despite the issue price being revised. It was ultimately rescued by LIC and other public sector institutions. The government sold 25.5% of the total shares in the company. LIC picked up 7.33% of the total shares in the company. The General Insurance Corporation picked up 2.93%.

Interestingly, the State Bank of India and the Punjab National Bank, also picked up 2.42% and 3.67%, respectively. Now, it is worth remembering here that both these banks are battling with a massive amount of bad loans and incurring losses in the process.

For the period of three months ending June 30, 2018, the State Bank of India made losses of Rs 4,876 crore. For the same period, the Punjab National Bank made losses of Rs 940 crore.

The question is, given these losses, why are these banks buying (or rather being made to buy) stakes in dud government companies. The shares of Garden Reach Shipbuilders were allocated at Rs 118 per share. Since then, after listing and as I write this on the morning of October 17, the price has fallen to around Rs 95, a fall of 19.5% from the issue price.

This is how the policyholders of LIC and the deposit holders of State Bank of India, are being skimmed by the Indian government.

In fact, an analysis of 10 IPOs of public sector enterprises, over the last three years suggests that LIC bailed out five of these companies. The analysis carried out by Bloomberg Quint suggests that out of the total amount of Rs 26,460 crore raised by these companies (Mishra Dhatu Nigam, Bharat Dynamics, Hindustan Aeronautics, The New India Assurance and General Insurance Corporation), Rs 14,520 crore was invested by LIC. This works out close to 55% of the amount raised.

Eight out of these ten IPOs are currently trading below their listing price. Guess who is paying for it? The policyholders of LIC. The tragedy is they don't even know about it. In their dreamy everyday world, as far as their investments go, all is well.

Given that, the government will be desperate for money during the second half of this year because of central GST not bringing in enough money, chances that LIC will have to come to rescue its share sales, are very high indeed. This will come on the back of the government already taking over IDBI Bank and possibly taking over IL&FS as well, businesses in which it has no expertise at.

Regards,

Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul Publishing

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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