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Mainstream, VOL LVI No 49 New Delhi November 24, 2018

LIC Making Unwarranted Investments: Policy-holders’ Money at risk

Sunday 25 November 2018

by N. Sundaramurthy

LIC — IDBI Deal

The respective boards of the LIC and IDBI bank have approved the transfer of 51 per cent of the ailing bank’s shares to the LIC. Not lagging behind, the Insurance Regulator—IRDAI—has approved the deal. According to the IRDAI Act, the LIC cannot hold more than 15 per cent stake in a company. A primary question arises: how could the IRDAI breach its own rules? As on June 30, 2017, the LIC held 18.91 per cent stake in the Corporation Bank. (In the year 2000 or so, when the LIC entered into a strategic partnership with the Corporation Bank, it was around 26 per cent The main conside-rations for the strategic partnership were bank assurance and premium collections.) But there is a big difference between 18.91 per cent and 51 per cent! Did the IRDA have the discretionary power to relax the upper limit?! The dictat could have come from the PMO. In such an eventuality, was it a policy-matter of the government to transfer the majority stakes of the IDBI Bank to the LIC? What were the underlying reasons for such a policy, which could pose threats to the security of the LIC policy-holders’ money?? The government needs to come clean in this matter. Further, the deal needs to be cleared by the RBI, SEBI and it has to conform to the provisions of the Banking Regulations Act. We have to wait and see how things will unfold.

There is yet another factor. The IDBI Bank has its own joint venture life insurance company called the IDBI Federal Life. As on July 31, 2017, the cumulative share of First Year Premium of the IDBI Federal Life was 0.40 per cent and the cumulative share of the number of policies was 0.49 per cent The same for the LIC were 73.68 per cent and 74.86 per cent respectively. There is no comparison between the LIC and IDBI Federal Life. This piece of business statistics apart, how will the LIC deal with the IDBI Federal Life after it acquires majority stakes in the IDBI bank? The two are competitors.

The print media and leading experts have vehemently opposed the IDBI stake sale to the LIC. The leading unions in the insurance and banks have criticised the deal. In this context, a few issues need to be understood.

The full form of the IDBI is the Industrial Development Bank of India and it was given birth on July 1, 1964. It came into existence after the passage of the IDBI Act 1964. It was registered under the Companies Act. It was a Development Financial Institution and entirely owned by the Central Government. Thus since its inception, the IDBI was a public sector entity. It was to finance mainly large scale industries that had the potential to generate mass employment. Thus, the IDBI as a financial institution had a clear-cut role and purpose.

In 1969, 14 private banks were nationalised. This was followed by the nationalisation of five more private banks in 1980, taking the total to 19.

In 2004, the IDBI was converted into the IDBI Bank Ltd., a limited company, by enacting the “Industrial Development Bank (Transfer of Undertaking and Repeal) Act 2003”, simply called the Repeal Act.

With effect from April 2, 2005, the IDBI Bank Ltd., which was a wholly owned subsidiary of the IDBI Ltd., was amalgamated with the IDBI Ltd., in terms of the provisions of Section 44 (A) of the Banking Regulations Act, 1949. The change of its name to ‘IDBI Bank Ltd.’ became effective from May 7, 2008. The Government of India owned majority stakes in the bank. We need to take note of a subtle difference about the character of the IDBI. From the inception, it remained a public sector institution, another example being the SBI, and not a nationalised entity.

The present status of the IDBI Bank is very disturbing. There is a serious financial crisis. According to its books, 28 per cent of the loans advanced has turned into toxic NPA. In absolute terms, it could be in the range of Rs 55,000 crores. In reality, it could be about 35 per cent There are also reports of other financial irregu-larities, favouritism and nepotism while advancing loans, mismanagement etc. Some of them are being investigated by the CBI. But no disciplinary action was initiated against the bank’s delinquent top executives who were responsible for the present state of affairs. Why should such a bank be inherited by the LIC? In the first place, whether the LIC should have a banking arm is an issue that needs careful scrutiny. In the year 2000, when the insurance sector was opened up for competition, the management of the LIC was mulling the idea of starting its own bank. The unions in the LIC firmly opposed the move. The argument of the management was that if banks could open insurance companies, why should the LIC not open a bank? The employees’ unions said the LIC is best in insurance and it should strive to retain that pride of place. There was “no need to puncture holes in our own boat” was the refrain of the unions. The matter was put in the cold storage. Today the LIC is the largest life insurance company in the world, with outstanding claims settlement performance. It has the sovereign guarantee and has emerged as the most preferred life insurance brand in India. It has also emerged as the largest institutional investor in India. Some of the investments made by the LIC in the recent period are vulnerable. Such investments were mandated by the government. Thus, the NPA of the LIC could be rising. This is a cause for worry. There is a question—is the LIC the ATM of the government for all its ill-conceived financial experiments?

If the LIC is allowed to own 51 per cent stake in the IDBI Bank, it will amount to Rs 10,000 to Rs 13,000 crore investment in the sick bank. By investing that much money, the LIC will be inheriting Rs 55,000 crore NPA of the bank. This surely does not make business sense.

Secondly, what is the investible surplus in the LIC? The LIC was started in 1956. The Government of India invested a paltry Rs 5 crores in the LIC, not as capital, but to meet the initial establishment expenses. Theoretically speaking, an insurance company, more so in life insurance, does not need capital. The money paid by the insurance customers in the form of premiums constitutes the capital. Thus the LIC is a mutual company, which means it is run with the money of the customers. For a long time the ICICI Prudential and Standard Life Companies were mutual companies. This continued almost upto the year 2008, the year which witnessed the global financial crisis, the great meltdown. Therefore, the money, the surplus, in the LIC belongs to the over 30 crore life insurance customers. The dividend paid by the LIC to the Government of India out of its Valuation Surplus for just one year 2016-17 was Rs 2,206.70 crores, on the initial investment of Rs 5 crores by the government. That truly reflected on the strength of the LIC. The LIC’s total investment in the government and social sectors, as on March 31, 2017, was Rs 17,32,579 crores.

The government cannot take the savings of the LIC customers for granted, by investing it in sick entities like the IDBI Bank. Has the government arm-twisted the IRDAI to relax the 15 per cent stake sale limit? The buck may not stop at that. The sick bank will require regular infusion of capital from the LIC for several years. The IDBI Bank has the highest NPA among all banks and posted heavy financial losses for the last three years in a row.

It will be interesting to revisit the infamous Mundhra deal that rocked the LIC in 1957 and compare it with the present-day financial frauds happening in the country. Haridas Mundhra was a Calcutta-based industrialist and a stock broker. He got the LIC to invest a sum of Rs 1,26,86,100 in six of his troubled companies. This investment was done at the behest of the government. The LIC’s Investment Committee was not consulted. It was obvious that Mundhra had certain influence on the Finance Ministry. The dubious investment turned out to be a scam and became sensational. Parliament was plunged into turmoil. The man most agitated was Feroze Gandhi. He was an MP belonging to the ruling Congress party. He was the son-in-law of the Prime Minister, Pandit Jawaharlal Nehru. But he did not spare the government and demanded a Commission of Inquiry into the financial scam. Nehru had the fortitude to appoint M.C. Chagla, the retired Chief Justice of Bombay High Court, as the one-man Commission of Inquiry. In one of the most transparent investigations ever in India, M.C. Chagla worked remarkably fast and submitted his findings to the government in just 24 days. The hearings were conducted in public. He held the Finance Ministry responsible for the LIC’s questionable investment in Mundhra’s companies. Owning moral responsi-bility, T.T. Krishnamachari, the Finance Minister, resigned from his post on February 18, 1958. Mundhra was arrested and sent to jail.

The amount involved in the Mundhra deal was just around Rs 1.26 crore. Today, we cannot even buy a 30x40 site in any major city with that money!

What stood out during the Mundhra deal was the speed with which the inquiry was conducted in a transparent manner, fixing of the moral responsibility on the Ministry and the punishment dealt to the wrong-doer. In today’s India, can we even imagine such a parallel? The thrust of the Chagla Inquiry Commission Report was: the LIC’s policy-holders’ money cannot be frittered away.

What could be next on the assembly line? The government is thinking of capital infusion into banks, which are facing serious crisis because of the capital inadequacy propelled by the mounting NPAs. It is already in the news that the LIC may be mandated to subscribe to the banks’ Recapitalisation bonds to the tune of Rs 1.35 lakh crores.

LIC to bail-out IF&LS Limited

The LIC’s finances are under pressure and the pressures are coming from the Union Government. A serious doubt is raised whether the LIC has control over its investments.

Now, the LIC has been asked to invest more capital in the private infrastructure development company, the IL&FS Ltd., in which it already has 25.34 percent stakes. IL&FS is in serious financial crisis with a debt burden of Rs 91,000 crores. The LIC is turning out to be a milch-cow. Instead of using people’s money for people’s welfare, the people’s money is used for private loot.

The IL&FS Ltd’s debt burden of Rs 91,000 crores is three times the amount the government has gifted to Anil Ambani’s firm in the Rafale deal. Why this generosity for a private company that is going to cause financial instability in the economy?! In 2007, when Narendra Modi was the Chief Minister of Gujarat, projects in the State worth Rs 70,000 crores were assigned to the IL&FS Ltd. Till date those projects have remained dormant. The IL&FS Ltd. has more than 160 subsidiaries of which only six are registered. Taking over the IL&FS Ltd by the government and pumping more and more of the LIC’s funds in it may create a volatile situation. The LIC’s valuation surplus and dividend to the government and bonus payable to loyal customers may suffer repercussions. The country is racing towards a serious economic crisis and in the process the LIC is bound to be hurt. Renowned economists have compared the IL&FS to the Lehman Brothers that triggered the global financial crisis in 2008. (The Great Economic Meltdown

As a result of the risky investments, the LIC’s NPAs are steadily rising which is a matter of alarm. The following data is revealing.

According to indications, the gross NPA of the LIC for the year 2017-18 could be 6.5-7 percent.

The government says that at any cost the IL&FS has to be kept afloat. It is a NBFC. What were the government and RBI doing all these years, when the finances of the IL&FS were in trouble? Now, the government has superceded the Board of Directors of the IL&FS and has appointed a new board with banker Uday Kotak as the Executive Chairman. There is more to it than what meets the eye!

The LIC is the largest domestic institutional investor in India and every year it invests in the equity market something like US $ 7 to 8 billion.

The LIC may try to comfort us by saying its investments are safe, prudent, conservative, long-term and it buys shares when prices are cheap. And that the size of the LIC’s assets and the continuous flow of fresh monies may take care of the market fluctuations. Still, there can be cause for worry. We have seen how demonetisation flopped. We are seeing how the government is handling the Rafale deal, endangering the security of the nation. An internal document of Dassault Aviation showed that the joint venture with the Anil Ambani-led Reliance Defense Ltd. was an obligatory trade-off and mandatory for the Rs 59,000 crore deal. It was quid-pro-quo! It is evident that the Modi Government forced the French to give the defence contract to Ambani. The economic security of the country and its sovereignty will be in peril if the government persists with its sinister agenda of weakening the LIC by gambling with its funds and, in the longer run, use it as a ploy to privatise the LIC. That is what the international financial capital is waiting for.

The LIC’s top executives may say that the LIC’s investments are sound. This is only a stock reply. Four years ago the ONGC was a highly profitable and cash-rich company. But today it is in dire streets. The culprit was the Central Government and its regressive economic policies. We are expressing concerns about the LIC’s investments not to raise a scare or to tarnish its image. We love the LIC; it is the backbone of India’s economy. It is a nation-builder. It upholds and serves the country’s economic sovereignty. The LIC must be allowed functional autonomy. We need to speak truth to power.

Will LIC be instructed to go Public?!

The Finance Minister, Arun Jaitley, has gloated that the “LIC would be the country’s most valued company, if listed (in the Stock Exchange)”. Is it an indication of the likelihood of floating the LIC?! The Insurance Act is amended and the government has directed the PSGI companies to go public. The IPOs may feed the government’s coffers. But, they will grossly dilute the objectives of nationalisation and will alter the character of the public sector institutions.

The LIC is the repository of the people’s money. To misuse their money to bail-out the sick entities means public loot of the people’s savings. The people of India have abundant trust in the LIC. That trust cannot be allowed to be damaged or eroded. A greater sinister design is discernible. The LIC could be converted into a dumping ground for all toxic NPAs. When the toxic substances start corroding the vitals of the LIC, it can be used as a ploy to declare privatisation of the LIC. That suits the agenda of the mindless policies of market liberalisation. Scamsters loot the banks. The LIC will be asked to use the policy-holders’ savings to bail out the banks. The LIC policy-holders must not be taken for a ride. The LIC is vital to the country’s economic sovereignty. It shall not be undermined. A bleeding LIC is unthinkable.

Post-script: The CBI is in tatters. The autonomy of the RBI is in peril. With demonetisation a flop, the government is eying the RBI’s Rs 3.6 lakh crore capital reserves to fund populist schemes in the election season. The fiscal deficit is burgeoning and is double the Budget estimate. The once cash-rich ONGC is in financial crisis. Key institutions like banks, the LIC are in the line of fire. The HAL was side-lined in the Rafale deal. People see a method in the madness. At the same time, it is raining bonanzas for the Ambanis, Adanis, Dalmiyas and Vedantas. This is ominous! Which way is the country being directed? It is time for introspection.

The author is the Vice-President, All India LIC Employees’ Federation.

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