Will  LIC  Go  AIR  INDIA  Way -  GOI has initiated the process of  putting the financial sector in high risk zone

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I have decided to write on this topic as I feel that the recent developments in the financial sector are likely to have too serious implications in next few years, but media is either not able to appreciate the intricacies of risk management or are afraid to come up in the open to educate the general public.

The drop in year-on-year GDP growth rate to 6.1%, from 6.9% in the third quarter, did not surprise me as the recent developments in the country have already indicated towards that.   The surfacing of various scams and wastage of funds by various organs of the GOI has derailed the growth story. 

The worrying factors are not only the current status of the economy but the future which appears to be bleak. The economic downturn is likely to reduce tax collection  making it more and more difficult  for the central government to meet its FY2011-12 deficit target of 4.6% of GDP.   The projections by various agencies indicate that deficit can even touch 6.0%.

We have been hearing  dilly-dally of GOI for capitalizing Indian banks which needs capital on priority basis.  One day FM says that banks will be given all the capital needed, but next day somebody else issues statements that owing to constraints they may not be able to fund all the capital and they are exploring other options.

The crisis leading to high deficit has already started showing the nervousness on the part of GOI.  They do not want to give up their control on the public sector units, but do not have the sufficient funds to pump for the growth of such units. 

Now they have found one Kuber ka khazana  i.e. LIC.   GOI has now decided eat away this khazana.  It is aptly said that GOI has taken the LIC's tagline in true spirit  "Why Go Anywhere Else?".  They have realized that when Gold is lying at home, thee is no need to worry and they can spend or waste the way their ministers wish.

On 1st March 2012, just few minutes before the government's first ever disinvestment through the auction route was about to end in a fiasco,  LIC was roped in to save the GOI from embarrassment.    The reports clearly indicate that LIC was forced to pick up 37.7 crores shares  of ONCG at a rate of Rs303.67 per share.  Thus about Rs11,426 crores was invested in ONGC shares by LIC.    In next two days, LIC suffered a loss (GOI will love it call it notional loss - as most of the bankers called it when derivative scam was surfaced ) of Rs912 crores.   Certainly, future of stock prices is uncertain and ultimately shares may go up.   However, question which remains to be answered is, whether an institution like LIC (in which common man has put his trust) should suddenly decide to put Rs12000 crores in a single issue.

Lately it has been reported that as the above investments could not complete the sale of the shares offered on auction, then even SBI was asked to pitch in the dying moments of the closure of the issue.   It is still a mystery whether it was done after the closure of the timing of the auction.  If this is true, then it is a shame on the part of the SBI management that bowed to pressure so easily that they were ready to put about Rs.900 crores of the public without proper analysis and Board approvals.

On 3rd March, 2012 it was reported that GOI has allowed LIC to breach IRDA ceiling.   Is FM or babus in GOI not aware as to why such ceilings are put in place ?   The higher cross holding of shares by the financial institutions can lead to systematic risk and ultimately failure of the financial sector in times of stress.   Now LIC has been asked to take a stake in public sector banks as GOI does not have the funds to increase the capital of such banks.  LIC has been asked to invest about Rs 1500+ crores in PNB (thereby increasing the stake in the bank beyond 10%).  Dena Bank will also extract 5% more of its equity from LIC.   Syndicate Bank is also likely to get Rs300+ crore on the platter as per instructions of GOI

Any banker associated with Risk Management will easily see the dangers looming large of such actions of GOI.  In stressed times for the banking industry, the shares of these banks are likely to fall and it will result in massive losses in the books of LIC as they will be required to mark these investment on MTM basis.  Thus, LIC took will come under stress.  The returns on such investments will dwindle and poor common man who has put his trust in LIC thinking that is is a government undertaking will realise that he has been cheated as it happened in case of UTI.

It is high time that RBI should intervene and stop breaching of various prudential limits for cross holding in financial institutions and large scale investment  on a single day in one company.   Even a salaried person is always advised that he should use SIP to invest in shares.  Then why LIC has put almost Rs12000 crores on a single day in a single company ?  Is there nobody in LIC who looks after the Risk Management of the investments.   Do they not have any policies to regulate such arbitrary investments ?

There is an urgent need to stop this method of putting the  public money at high risk.   Or else it may become another scam.  If things are not stopped by the regulators like RBI, IRDA by putting their foot down, LIC and some banks may be going the Air India way - of course slowly and not at jet speed.  LIC unions needs to watch the trends in this regard and caution the management about this or else next wage revision may be jeopardy.

I feel GOI has initiated the process of downfall of LIC.    I wish I may be proved wrong.