In a last-ditch attempt to mop up resources through disinvestment, the finance ministry has upped the limit for the state-run Life Insurance Corporation (LIC) to buy equity stakes in companies up to 30%. Financial services secretary DK Mittal said on Wednesday a notification was being issued to allow LIC to hold up to 30% in listed/unlisted companies against the current cap of 10%.
With the norms being eased, the cash-rich insurer can now pick up large chunks of PSU shares expected to be put on offer in the coming months. While it has been targeting R30,000 crore from disinvestments in 2011-12, the government has mopped up virtually nothing so far.
Having received a tepid response to the auction for 2G spectrum — which fetched it just R9,400 core against an expected Rs 30,000 crore — and with the growth in tax revenues sluggish in a slowing economy, the government appears to be pulling out all stops in a bid to rein in the ballooning budget deficit.
The insurance regulator has strongly opposed the ministry’s idea, saying it would not be prudent and pointing out that large exposures to individual companies could pose risks to LIC. The Insurance Regulatory and Development Authority (Irda) has also been concerned over any likely negative impact on LIC's financials from its heavy annuity payouts.
For some time now, LIC has been buying stakes in several public sector banks including Bank of India, Punjab National Bank and Dena Bank. LIC also bailed out the government in February 2010 by subscribing to almost half the NTPC issue. The insurer also bought 43 crore shares of ONGC in March this year after investors stayed away from an auction at around R304 apiece. In mid-May this year, Moody’s Investors Service downgraded LIC’s foreign currency rating of to Baa3 from Baa2. Among the reasons for the downgrade was the significant exposure the insurer’s balance sheet had to domestic sovereign debt relative to its capitalisation.
Companies lined up for divestment this fiscal include NTPC, BHEL, NMDC, Oil India, SAIL, Nalco, MMTC, Hindustan Copper, Power Grid, Engineers India and Neyveli Lignite.
While all these may not hit the market, the auction route will be preferred in a clutch of cases that might go through, enabling institutions like LIC to play a decisive role in carrying out the government's disinvestment agenda. Worried that market sentiments are not strong enough, the government pins hopes on the offer-for-sale route to