Imagine this: A huge Reliance group public issue is about to hit the market. A company official tells the Reliance Life Insurance Company, which manages policy holders' money, to subscribe to the issue. He doesn't stop there. The official also wants the lifer to put in his bids early, so that other investors are also encouraged to come in. All this happens in full public view in front of the media, in fact, through the media.
Won't the insurance regulator show concern about a promoter entity interfering in the affairs of a regulated insurer? Won't the market regulator be concerned about the obvious conflict of interest? Will the investment committee of the insurer allow itself to be dictated by external directives?
However, both of these - regulatory action or restraint by the investor – were conspicuously absent last week when the government, the largest promoter, openly gave directions to Life Insurance Corporation of India (LIC), the largest custodian of public money, ahead of the Oil India share sale. It had the audacity to tell – through a newspaper article – that LIC had to put the bids in early. "It was observed that LIC generally puts in bids at a later stage. If the insurer can put an early bid, it may give the required impetus, and the issue may be picked up by other investors," the article quoted an unnamed official as saying.
If he was able to say so much in the public domain, I wonder if he had even given the hour-wise break-up and the price for each bid to the behemoth.
It is not clear how much of these instructions LIC actually complied with. LIC has said in the past that its investment committee has its own rationale for investing in public sector undertakings (PSUs). Let us analyse how such investment rationale, which somehow often closely resembles the government's investment advice, has turned out in the past. In the first quarter of 2010, LIC bought some 196 million (4.97 per cent) NMDC shares at Rs 300 each to bail out a government stake sale via a follow-on public offering. About 30 months later, the government again sold a chunk of NMDC and LIC was there to buy; this time the price was Rs 147. This time, it bought a lesser number of shares at about 19 million (0.46 per cent), taking its stake to 5.53 per cent.
NMDC is not the lone case where PSU shares have dived after the insurer invested. A Business Standard report last year had talked about telecom player MTNL, where one of the funds of LIC holds 18.8 per cent stake. While the average cost of acquisition was around Rs 92 according to the report, the shares are today trading at a quarter of the price. LIC has argued in the past that these are long-term investments and should not be marked to market. Last week, this paper also reported how Sebi altered rules to save a Nalco offer for sale. Ever since the disinvestment programme started in 2009-10, the public issue framework has been tinkered with endlessly and the manner in which Nalco was saved was a new low. And, there is the government's mockery of the Insurance Regulatory and Development Authority rules. Don't even get me started. What is the long-term impact of manipulating regulatory authorities and public institutions for the short-term benefits of the disinvestment programme? Who is going to pay for it?