Is LIC taking too much of risk? But why?
Just trying to link various news on LIC in recent times.
"The government has allowed Life Insurance Corporation (LIC) to own up to 30 per cent stake in a listed company despite insurance regulator IRDA having some reservations on insurance companies, specially LIC holding more than 10% in listed companies. Snubbing IRDA's reservations the government today went ahead to notify the increase in LIC’s investment cap.
Here's the full story. LIC Act, 1956, says that LIC is eligible to hold up to 25 per cent stake in other companies. However, in 2008, Irda Act was amended, which restricted the stake that insurance companies can hold in other firms to 10 per cent. Going forward, IRDA asked LIC to limit its investments. LIC sought relaxation in this limit, and it is now that the government has notified the same."
Now, the point is why Govt. owned LIC is taking too much risk in their financial portfolio?
10% cap is fair enough in a single company. 30% exposure to a single entity is clearly non-professional step. Imagine a portfolio, build in 2007, with exposure to 30% in Satyam – a bluechip company of that time. Can you guess the value of that portfolio after the famous "Satyam Scam"?
Well, LIC lost about Rs.950 crore at that time.
The main reason is Govt. is really worried about their disinvestment plan for this FY after the failure of recent 2G spectrum auction. They know they won't get good price from the open market. So, they are modifying the laws to allow LIC to buy HUGE stakes in public sector companies.
And we all know India is moving forward for the next Lok Sabha elections. Generally, investors especially FIIs sell their good exposure in the stock market before election and wait for the new Govt. to take charge. That means a healthy correction is coming in next few months. With this new law, LIC will buy huge amount of shares of PSUs at such a high PE.
In the month of March 2012, Govt. government had put 42.7 crore shares for sale and according to the filing, LIC picked up 88 per cent of the shares. The sale had turned out to be utterly chaotic with buyers falling short and public sector banks and LIC moving in at the last minute to save the day for government.
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