The insurance giant wants the regulator to ease rules so that it can aggressively play with public money despite poor transparency and disclosure

Insurance giant, Life Insurance Corporation of India (LIC) wants to participate in equities more aggressively, by ‘trading’ Indian public money and has asked the regulator Insurance Regulation Development Authority (IRDA) to ease rules and make an exception, only for itself, to the equity exposure rule which caps equity holdings to a single company up to a limit of 10%.

In an Economic Times interview, DK Mehrotra, the chairman of LIC, said, “Companies where we are reaching 10% or are beyond 10%, we cannot trade in them, not even for booking profit. If I trade, as per the regulation, I cannot go above 10% again. That is preventing me from booking profits in good scrips.” Further, the chairman said, “We have suggested to the regulator to allow us to grandfather whatever investment we had till 2008. Beyond that I should be given an opportunity, which I can use as trading portfolio.”

LIC’s equity portfolio consists of many blue-chip stocks but also a host of public sector companies as well as dubious investments in beleaguered private companies in the aviation, power generation, infrastructure sectors, which are seeking restructuring of their loans even as their share prices have sagged. The exact details of LIC’s investments are not known but given the way capital-intensive stocks that populate LIC’s portfolio have performed so far, LIC has not been doing too well with its equity investments. For a bunch of laidback public sectors babus whose jobs are rotated from PR to business to HR and so on and end with a peaceful retirement, to be able to trading in and out of the market seems a bit far-fetched.

While we don’t how LIC has been negotiating the equity market, we have some clue—it performance as a fund manager of a mutual fund—LIC Mutual Fund (now LIC Nomura). The performance, by a separate team of stock experts, has simply been pathetic. In our cover story, Best Fund Houses (issue dated: 31 May 2012 http://moneylife.in/article/best-fund-houses/26233.html), the fund house was at the bottom of the list in all category of funds. Astoundingly, all of its three equity-diversified schemes failed to beat the benchmark in any of the 12 five-year monthly rolling periods ended 31 March 2012! The schemes underperformed the benchmark by an average of 3.31 percentage points.

Most alarmingly, the fund management has failed even at passive investing. In the same period mentioned above, the index schemes underperformed their benchmark index by an average of 3.12 percentage points. Out of all its schemes, the LIC Nomura Infrastructure Fund has been the worst performing in the last one year. Launched in March 2008, the scheme has given a return of -16.38% for the 1-year period ended 12 June 2012.

LIC hasn’t been the most transparent company, in terms of disclosure. Very little is known to its equity portfolio structure. Since the bulk of the money that LIC wants to ‘trade’ with comes from the Indian public, especially from semi-urban and rural areas where LIC is seen as equivalent to government. Therefore disclosure is paramount, so they know where their money is parked. Its balance sheet was a whopping Rs12.82 lakh crore as of public money last year, which could be deemed “too big too fail”, especially if it is seeking to invest in risky instruments. The insurance giant’s portfolio value is around Rs60,000 crore.

Recently, LIC had been in the limelight for its heavy investment in public sector companies; for instance Oil and Natural Gas Corporation (ONGC), where it scooped up over 84% of the PSU exploration and refining major’s shares in the latter’s recent offer. Also, its exposure to ONGC as part of its total portfolio is more than a third. The value of the ONGC portfolio was supposedly Rs21,752.91 crore on 31 March 2012. The price of ONGC has been flat since, and its investment in the company is barely above the water.

If LIC insists that it be given an exception to invest in excess of 10% and trade, it will need to make big disclosures and be a lot more transparent with the Indian public—all the time—not just for the public’s good but for its own as well.