Insurance News: Playing with public money

By allowing the Life Insurance Corp. of India (LIC) to increase its investment threshold in companies against the advice of the insurance regulator, the government is sending out yet another signal that the independence of the institutions is under threat.

The Union ministry of finance (MoF) recently said the government has allowed LIC to raise its investment from the current threshold of 10% of outstanding equity shares in an “investee” company to 30%. Insurance Regulatory and Development Authority’s (IRDA) 2008 investment (4th amendment) rules say insurance companies can invest in the shares or convertible debentures of a company so that no more than 10% of outstanding equity shares or 10% of the respective fund, whichever is lower, is invested in one company. The MoF move breaches this rule, though it is taking shelter under one section of the LIC Act that allows the government to supersede the insurance regulator.

Other than being just another example of an increasingly unreasonable government, this move is harmful for two reasons. One, by treating LIC differently from private insurance companies, the MoF move will encourage the state-owned insurer to disregard the authority of the regulator. And this has consequences, the possibility of a market failure being one. The Unit Trust of India (UTI) had been unwilling to submit to the newly formed capital markets regulator’s mutual fund regulations and it took the collapse of Unit 64 in the late 1990s, at a huge loss to retail investors, before the clean-up in UTI took place. UTI Mutual Fund is now fully under the capital markets regulator. By telling LIC that it need not be concerned with what the regulator says or prescribes, the government is setting it up for trouble ahead.

The timing of the move seems to indicate that the limit has been hiked to help with the disinvestment programme of the government. The Rs.2.25 trillion pot of retail money managed by LIC that is in equity can be of help as it was in the ONGC disinvestment. But should retail money be forced into public sector stocks? Consider returns over the last few years: a five-year return comparison of the CNX PSE index (the 20 stock index of public sector enterprises) with the S&P CNX Nifty (the broad market index of 50 stocks) shows the PSE index yielding a return of 41% point-to-point. Sounds good? But over the same time period, the Nifty grew 114%. Over a 10-year period the PSE index tripled while the Nifty grew seven times. Clearly, if there is an investment choice, retail money would be better off in the broad market than in PSU stocks.