Although the finance ministry has given the green signal to Life Insurance Corporation (LIC) to increase its stake in a company to up to 25 per cent, the Insurance Regulatory and Development Authority is wary of the systemic risk of the move.
While the insurance regulator has mandated that insurance companies can have no more than 10 per cent stake in a particular company, LIC already has more than 10 per cent stake in various companies such as L&T, Tata Steel, Axis Bank, Punjab National Bank, Shipping Corporation of India and also in unlisted firms such as UTI AMC and IL&FS.
According to insurance sector officials, the LIC Act, 1956 permits it to take its stake up to 25 per cent, while the Irda Act, 1999, which came into effect much later, laid out the 10 per cent cap. The finance ministry is of the view that it has precedence over the insurance regulator for deciding the equity investment cap of India's largest insurer. However, according to industry players, this would lead to unnecessary contradictions and conflicts between the three entities .
Ever since Irda amended its Act in 2008 to put in place the 10 per cent cap, LIC has been lobbying for relaxation of this limit, as it had breached the threshold in various blue-chip stocks. In a recent conference, LIC chairman D K Mehrotra said that the 10 per cent cap precludes the insurer from participating in equity markets.
“At present, there is a lack of headroom in good inevitable companies due to the existing cap. We have spoken to the regulator in this matter and we would be happy if the cap is increased to even 15 per cent or 20 per cent,” Mehrotra had then said.
On its part, Irda had also expressed reservations about LIC’s equity exposure in various companies, especially public sector firms. Although Irda has not asked LIC to pare down its existing holding in firms where it holds more than 10 per cent, the insurer was asked to follow the 10 per cent cap for fresh investments.
“Prima facie, LIC holding more up to 25 per cent stake in companies shouldn’t matter. However, for better vibrancy of the secondary capital markets, and to facilitate better price-discovery, listed companies should not have concentrated investors. Additionally, LIC would unnecessarily be subject to various pressures by companies and other quarters, especially in times of special situations (mergers, acquisitions, etc.). Companies would, then, work towards pleasing just the LIC as the large investor, which isn’t healthy for corporate governance. Institutional investors should be independent in their investment decisions,” said Shriram Subramanian, founder and managing director, InGovern Research Services.
A senior LIC official said that although he is not aware of the investment cap being raised to 25 per cent for LIC, the government has confirmed that the provisions of Sections 43 (1 and 2) will be of significance. “As of now, the position is that it has been reiterated that the LIC Act is a special Act and hence has precedence over the other Acts,” he said.
According to the Section 30 A of the amended LIC Act of 1999, LIC’s exclusive privilege to carry on life insurance business in India ceased with the commencement of the Irda Irda Act, 1999 and LIC would carry on life insurance business in India in accordance with the provisions of the Insurance Act, 1938. After this amendment, the general belief was that LIC was under the purview of the Irda and would follow its guidelines.
Further, Section 43 (1) of the LIC Act mentions that certain provisions of the Insurance Act, 1938 would be applicable to LIC Act, too. However, Section 43 (2) of the LIC Act mentions that the central government can bring out notifications as and when necessary, to modify the requirement of making LIC follow the above said provisions of the Insurance Act. This would imply that the government could change these provisions at their will.
According to Ashvin Parekh, national leader- global financial services, Ernst & Young, although there are both merits and demerits in increasing equity investment cap of LIC. He said that there should be a level-playing field for both private and public sector insurance companies in India. “Regardless of the institution concerned, let there be an equal and level-playing field for both private and state-owned insurance players in the country,” said Parekh.