Wednesday, March 7, 2012

Don't kill Life Insurance Corp (LIC) please

One English word which confusing me now-a-days is 'disinvestment', especially after government's auction of ONGC stocks. So I searched again for the meaning, Princeton defines disinvestment as 'the withdrawal of capital from a country or corporation'. Investopedia define it as 'The action of an organization or government selling or liquidating an asset or subsidiary'.

In brief I can say, selling a part or full ownership in a company by its promoter. So what exactly Government of India is doing by selling the shares of Public owned companies?

As I point out in many of my preceding articles, government’s job is not manufacturing cars or operating insurance companies or telecom companies. It can serve the best interests of the society by focussing on the fields which are vital to society like defence, irrigation, space, supplying water etc. That means government should withdraw from other fields. Exploding deficits forced the government to bring back the disinvestment plans from cold storage.

But the mode of selling the shares in Public companies is raising more questions.

The ONGC story

The recent auction of ONGC shares, deferred three times in the past, didn't find many suitors. Even though government intended to sell 5% of shares initially, only 4.91% find their market. Reasons attributed to this dismal performance were - high floor prise and the uncertainty in sharing the fuel subsidies (heavy?).

Well, FII's and domestic institutional investors watched the drama from the shores. So who bought the shares in the end? Fascinatingly, it’s another government run company - the insurance behemoth Life Insurance Corp (LIC). Now the question is who will insure this insurer?

Life Insurance of Corporation - Who will morn at her death?

LIC is one of the real poster boys of Indian liberalization. The insurance behemoth is one of the rare companies which faced one of the ruthless competitions from both foreign and Indian companies yet fought back and remained as a market leader. Out of 427.77mn ONGC shares auctioned, government received bids for 420.3mn shares, out of that LIC alone bought 377mn shares for 303/share (floor price was 290Rs).

LIC's saga is not stopping here, according to a recent Business Standard report, LIC also holds huge stakes in many listed government run companies. It owns 24.81% of Corp Bank, 18.81% of MTNL, 15.92% of PTC India, 15.42% of Orissa Minerals, 14.13% of Shipping Corp, 12.76% of State Bank of India (SBI), 12.09% of Oriental Bank, 11.58% of HPCL, 10.92% of GNFC, 10.27% of Syndicate bank.

Apart from this LIC also holds stakes in Punjab National Bank (PNB), Dena Bank, Bank of Maharashtra, UCO Bank, Allahabad Bank, Indian Overseas Bank, IDBI Bank, Canara Bank, Syndicate Bank, Indian Overseas Banks, NMDC, NTPC, SJVN etc. Many of these operations resulted in losses. In the case of Shipping Corp LIC lost around 50%, PTC India that number is 41%, in NMDC it is 39% etc.

Shifting the money around the table

Well, auction helped government to raise $2.57bn. But can we call this as disinvestment? Government is selling the shares in one company and other government run companies are buying it. This is a brand of moving the money around the table will only help to generate a feel that all is well, which is not actually so. The apathy of market and the current economic condition may force the government to postpone the share auctions in other PSU's like BHEL, OIL etc. LIC can breathe for some time!!!

This will certainly create unpleasant effects and diminish the image of Indian stoke market in front of valuable investors. What we are doing here is by one arm government is offloading shares in one company and through another arm it is buying these shares. This will make sure that temporary interests of the government is served well, but isn’t a kind of fixing the share price artificially?

LIC should not pursue and government should not force the company to buy the PSU's in this way. They are not supposed to and should not be a box where government can divest the shares of PSU's in which other investors are not interested in.

If we continue this way, LIC's margins will take a big knock creating a big hole in her balance sheet. This is one of the easiest paths to join the league of Air India, Railways, BSNL etc.

Some tips from China - Fishing in troubled waters

Well, I am not a hard core fan of Chinese financial market and their way of lending money domestically. But there are something which we can learn from them - strategic investment. Before the financial crisis Indians were in a buying spree; no matter whether it is Corus, JLR, Zain, Novelis, REpower etc. We bought these companies at the height of the market, now after the crash when the prices reached the bottom no one is ready to go for fishing.

Look at Chinese, still they are buying the strategic companies. It's not that they didn't made mistakes, they too have their share of mistakes. But just take a look at their strategic investments in Europe itself - 8.68% of Thames water of UK, 9.3% of Club Med, Fosun's 10% stake in Folli Follie Group SA, China National Bluestar Group's acquisition of Norway-based Elkem ($2.35bn), Geely Automobile bought Volvo Cars ($1.8bn), Sichuan Tengzhong Heavy Industrial Machinery Company Ltd bought Hummer from GM etc. They are also buying oil and gas assets in US and Canada, big mining projects Africa etc.

This is something we should care about. I wish if LIC buys some troubled but strategically useful assets abroad!!!



1. India Raises $2.57 billion Via ONGC Stake Auction
2. LIC policyholders carry disinvestment can
3. LIC's growing exposure in PSUs a cause of concern for Irda
4. China wealth fund buys nearly 9% of Thames Water
5. China Turns Investment Eye to Europe

Photo courtesy - Original photo is from LIC website, later edited to suit this article

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