LIC: A Tool for Politicians and Officials for Quick Fixes
According to news reports, the Life Insurance Corp of India (LIC) will now buy shares in IDBI Bank from the government of India. Logically the price should not exceed one rupee for the entire lot (one rupee so that there is some accounting entry possible). Of course, if wound down, the government would have to pump in a few thousand crores to cover the depositors and lenders to IDBI Bank. In an election year, it may not be a good thing. So, LIC will add one more dud investment.
 
LIC is a strange animal. It grew up on taxpayer subsidies and is a friend of the politician, who wants to do things that are below the radar. It was started with virtually no capital and the tax exemptions helped it to build an empire. The word “insurance” or “life” has less to do with its business. The empire has been built on the sale of ‘investment’ products rather than pure life insurance products. They have also sold “Fixed Deposits” for five and 10-year periods under some label or the other, calling them ‘single’ premium products. Thus the name is totally misleading.
 
LIC is also a big shareholder in Indian equities. One wag remarked that it probably holds more shares than are listed on the bourses. In the old days, LIC was the ‘investor’ of last resort. Public issues would have ‘hard’ underwriting by the merchant bankers. And none of the merchant bankers actually had a balance sheet to pick up the devolvement. Most undersubscribed issues were simply ‘sold’ to LIC. 
 
Of course, till the beginning of the ‘90s, we had the DFIs or Development Financial Institutions, like Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India Ltd (IFCI), (Industrial Credit and Investment Corporation of India (ICICI), LIC, General Insurance Corporation of India (GIC) and Unit Trust of India (UTI), which were the pockets into which all unsaleable things were thrust down. ICICI was in those days not as bad as the other government owned DFIs. IFCI had the worst reputation and ICICI the best. LIC was always a dark horse. No one had any idea about their portfolio. It took many, many years before some semblance of disclosures began to be made.
 
In those days, the DFIs were important to all brokers and merchant bankers: to merchant bankers because the DFIs were the repository for anything that no sane person wanted; to brokers because they could get ‘institutional’ business and all promoter buying and selling had to find parking slots. It was a common sight, just after market hours, to see brokers waiting for a ‘darshan’ of the investment managers at UTI or LIC. 
 
You had to keep seeing them, be friendly with them, your boss had to know their boss and then only business could happen. Every day, in the morning, the institutions would call the brokers and give them orders and prices. I know there were stories, but from my personal experience, I was never asked for anything. Not that I got much business. Maybe my bosses were good at it.
 
In the ‘90S, I used to interact with the LIC investment team. I could see some desire to change. They apparently used to have some funny rules like ‘cannot sell a share below purchase price’ or ‘cannot invest in companies where there are no fixed assets of adequate magnitude’. You can imagine the portfolio. They missed out early stage investing in technology companies, their holding periods became ‘forever’. The person in charge of investments at that time brought about a lot of changes. Selling rules were changed. I was among the few who were asked to give our views on ‘small’ companies with a direct call to ‘buy’ or ‘sell’. A lot of cleaning up took place.
 
While this kind of day-to-day businesses went on, LIC was also a pawn in political hands. Whether holding shares beyond their internal limits in companies (ITC was a notable one) or playing games in Larsen & Toubro (L&T) or picking up shares even if their investment department did not like it. So much of debt paper used to be placed with the DFIs that I am sure the list of unpaid and bust debt paper would be miles long. The DFIs were a haven for debt outside the banking system. “Working capital term loan”, “debentures” were but a few of the popular ones.  And the DFIs were a lifeline for hundreds of brokers (not the stock exchange types) who would, in a year, place a couple of crores of debt paper of some small company and pocket 2-3% as their fee. Many small companies were not aware of avenues of financing and these intermediaries survived on their information edge plus their perceived ability to ‘fix’ and move papers.
 
Government ownership of banks and other financial institutions has been an important source of corruption. We are seeing the public sector banks (PSBs) wiping out wealth in figures that almost approach our gross domestic product (GDP). It is therefore very unlikely that the babudom will let go of these ‘kamadhenus’.
 
The IDBI story is truly a reflection on how flawed our lending system is. IDBI was the big daddy of our DFIs.  In those days, the DFIs had a right to convert some part of the loan in to equity of the borrower, at par. This was a rule and no exceptions. As a result, most good promoters were cautious about borrowing from the DFIs, whilst the not so good ones did not care. This was a savior for the DFIs. However, the industry lobby ensured that this clause was scrapped and then the decline was apparent. 
 
Thus started the next round of financial engineering. ICICI became a bank. IFCI did not become anything and IDBI, the big brother had to follow ICICI, which was the big brother in terms of strategy. And the brave UTI was permitted to start a bank! So, here we have a gruel, which has so many ingredients and no taste at all.
 
While ICICI emerged in a new avatar and UTI Bank (now Axis Bank) is also seemingly doing well despite dubious acquisitions such as Enam Securities and Freecharge, IDBI has truly ‘gone to the dogs’. Over a fourth of the loans are supposedly ‘non- performing’ loans. Salvage value is unknown. At this juncture, the promoter of IDBI Bank has to logically close down the bank. But no, the babus want the misery on the taxpayer to continue so that they can have their cake. So now LIC has been ordered to buy out IDBI Bank. It is contrary to all norms of financial prudence, legal limits and governance. But the promoter has never really bothered about it. What is politically expedient has been more important than what is right. 
 
They have cleverly diverted attention away from this bank, State Bank of India (SBI) and have targeted Bank of Maharashtra for some transgression which is less than Rs100 crore and there is also considerable doubt about the guilt of the persons who have been hauled in. If an honest probe were to be conducted into IDBI, the trail would probably lead to those in the government/s and/or bureaucracy.
 
Each of these ‘motivated’ investments from LIC policyholders’ money may seem very small in relation to the total size of LIC. However, the sum total of all such dud investments will be enough to break the bank, if made public. It would be wonderful to see a detailed schedule of LIC investments in equity and debt. And of course, we should also remember that the LIC and the PSBs are big holders of state government paper, which can only be redeemed by issuing a new paper. That is another Ponzi scheme that could come to light if the LIC stops growing.
 
I also recall that when the mutual funds were caught with dud commercial paper in the 2008 crises, there was talk of LIC Mutual Fund passing on the papers to big daddy at cost. Going by the returns on the investment schemes (called insurance policies by LIC agents) it does not look like LIC makes market returns. The insurance regulator, of course, is generally manned by a retired LIC executive, so that LIC is not troubled with uncomfortable questions. 
 
LIC has been totally abused by its politicians and officials. I do not know which will be the proverbial straw that will bring it down. But surely, it is headed there. IDBI Bank will need some excellent accounting to keep fresh capital infusion low. Restructuring the IDBI Bank is worse than starting a new one. Luckily, being a sovereign promoter, there is no fear of a run on the bank. The PSBs and LIC tell us what is wrong with the financial system due to the influence of the politician and the officials. 
 
Comments
Arnavaz m. Havewala
4 years ago
WOW!!!!
What a revelation!!
All LIC agents say its the safest company bcoz the Govt.of India supports it, and is there is a cash problem, the Govt.will bail it out.
Is that really true?
I hope so, bcoz I have been heari ng a lot of negative comments/facts about LIC.
And I wish I could surrender my LIC policies, but, alas, the surrender value is SO low, that I would not even get back what Ive paid in terms of my premiums.
Sachin Purohit
Replied to Arnavaz m. Havewala comment 4 years ago
That's not safety. You can not keep some money safe by printing more money to cover up the earlier mess without having repercussions somewhere else. You may get back your original money invested in it but the value of this money would have eroded due to devaluation and inflation that results from such jugglery.
Mahesh S Bhatt
4 years ago
India should have Tax free haven at Andaman's so that all black money comes back.Governments across the world have hyper taxed & these financial engineered products as suckers of common man Manmade misers & miseries. Mahesh Bhatt
B. Yerram Raju
4 years ago
So long as LIC is there, no need for a bad bank.
Quite Right
4 years ago
Lol.. you brought back memories of my days as a equity sales person in the 90's. Yes, queuing outside LIC and the other FI's office was standard, i made quite a few friends out there during the wait. Amongs the usual suspects, you missed out IL&FS , which was also the earliest to get the foreign investors through their doors. LIC was always a dumpyard and i wouldn't be surprised if the rot in the balance sheet is as dirty as those of the PSU Banks today.
Ashok Visvanathan
4 years ago
Succesive govts ran IFCI into the mud, after that UTI, Now IDBI., and LIC.
It will take time for LIC to die, most of LIC money by law is invested in Govt bonds and Treasury bills, the equity part is small.
R Balakrishnan
Replied to Ashok Visvanathan comment 4 years ago
A lot is in a Ponzi named "State Govt" and "PSU" bonds
Jairam S Narayan
4 years ago
It is sad that LIC is a tool in the hands of our Govt. Such investments will have a telling effect on LIC in the long run.
R Balakrishnan
Replied to Jairam S Narayan comment 4 years ago
In the long run, LIC will be bust
Ramesh Poapt
4 years ago
Truly 'yogakshema Vahamyam'!whose yogakshema?
about IDBI bank, once there was a view that present value of old IDBI's
land bank(mortgage of IP) can make book value of 200 per share!
what happened of that?
Nakul Akant
4 years ago
An Excellent read sir.
K V RAO
4 years ago
At this rate private sector insurers (read HDFC, Kotak Mahindra) will have the last laugh.

Such quick fix financial tricks will have deleterious effects on the entire public financial system.

Surprisingly none is talking about accountability in IDBI Bank. Reason: Collective/committee decisions saves everybody. The joke is: board members are not accountable for their decisions.

Poor LIC: What it can do? Of course the top guy can step out in protest But his reasoning to continue and concur is, there are people just waiting to occupy the throne and preparing to lick the legs of their masters.

To sum up Indian financial stories are turning literally tragic.

Pradeep Kumar M Sreedharan
Replied to K V RAO comment 4 years ago
LIC needs to be run down( the incentives lies within the process itself)
before it can be sold(again, the incentives lie within the process itself)
Rushikesh
4 years ago
"JINDGI KE SAATH BHI AND JINDGI KE BAAD BHI" WAH
R.BALAKRISHNAN
Pradeep Kumar M Sreedharan
4 years ago
When are we going to open the Pandora's Box, that is LIC NPA?
Ha ha ha ha
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