Life Insurance Corporation of India can now go ahead with its proposed Rs 1.5 lakh crore funding of the Indian Railways, with a finance ministry clarification effectively nullifying the Irda’s concerns and demand for sovereign guarantee for the investment.
LIC had signed a memorandum of understanding two years ago to invest in the railways through bonds issued by the Indian Railway Finance Corporation (IRFC). But since this would take LIC’s exposure to more than 25% of IRFC’s net worth — it has to keep the investment within that limit in any company involved in infrastructure, debt and equity included —the insurance regulator demanded explicit government guarantee for the bonds and a gazette notification classifying these as special securities, like oil bonds.
The finance ministry has now issued an order, clarifying that the IRFC bonds can be treated as approved security for investment above the exposure limits. It didn’t offer any government guarantee on the bonds, but said the bonds were covered by Section 2(3) of the Insurance Act under which the repayment is charged on the revenue of the railway ministry. The railway ministry’s revenue, in turn, is backed by budgetary allocation.
The charge on the central government revenue is more than a government guarantee, as it amounts to express intention of the government to pay out the obligation, whereas payment against guarantee will happen only when the guarantee is invoked, the finance ministry said.