Market experts have lauded the government’s decision to allow LIC to invest up to 30 per cent in listed companies from the current limit of 10 per cent as it will allow the insurer to deploy its huge resources more meaningfully into blue chip stocks. There are concerns, however, that high concentration in one stock is not always a sound strategy.
Observers see LIC as maintaining the balance in a situation where foreign institutional investors (FIIs) pull out. “The move will provide greater flexibility to the fund managers of LIC by allowing them to invest more in stock that they are comfortable with and will also allow LIC to act as a counter balancing body when FIIs pull out,” said Aseem Dhru, CEO, HDFC Securities.
Others believe that given the huge resources generated through premium collections, the insurer could now invest more in large cap stocks and those of higher quality. “The move will help LIC to deploy its resources more rationally and meaningfully,” said Manish Sonthalia, vice president and fund manager at Motilal Oswal AMC. “With the amount of resources it has, it can invest only in stocks of certain size and this move will allow it to invest more in large cap, less risky and high quality stocks rather than just diversify for lack of options.”
However, experts have their concerns on high concentration and government milking it for its disinvestment programme. “The fundamentals of risk management say that it is not a good idea to have high concentration in one stock and they will have to be discreet. Also if they use it for government’s disinvestment then it will not be a good thing to happen,” said Dhru. While the government allows LIC to hold upto 10 per cent in listed companies, the insurer has holdings between 10 per cent and 25.5 per cent in 38 listed companies.
There are 10 major firms that had market cap in excess of Rs 20,000 crore where LIC already holds between 10 per cent to 17.7 per cent. It holds 25.49 per cent in Corporation Bank and 18.8 per cent in MTNL as of the quarter ended September 30.