We have always come across the news about LIC pumping money to the loss making companies out of Government pressure. We have also heard that LIC bought the stake of a company at a very high price.
Few months back there was a huge criticism by media on LIC buying a stake of IL & FS. Earlier to that, there was criticism on LIC making bulk purchase of IDBI.
When I started my career with LIC, I was not able to understand, being a well reputed Govt. undertaking, why does LIC involve itself in such a work which brings criticism and loss of reputation for LIC.
Today, question remains in my mind but in a different context; why does media criticise LIC? Why our Indian media is so negative?
It is very obvious that it creates doubt in the minds of policy holders, especially after so much of media coverage to these news. There are certain facts which a policy holder must know about the LIC which today’s biased media will never write / show to the world. In this situation, I believe, it becomes my duty to share all those facts with my valued clients and the society so that they are not misguided in the future. This has inspired me to write this article.
Considering the seriousness of the topic, I have taken liberty of writing this article in detail which has made this article little lengthy. But I am sure, the readers will surely appreciate it after reading the whole article as the facts discussed are really eye openers. Writing this article has consumed a good amount of efforts and time on the research work.
I have divided this article in two parts; Part 1 & Part 2, so that readers can study this article with ease. Considering the length of this article, the Part 2 will be published in the next week.
This is not the first time, LIC has been criticised, it has happened many times in the past also. And I am sure, it will be repeated in the future also. Whenever LIC makes bulk purchase, it has been questioned. But let me inform you, over the period of time, all those stocks have proven to be highly beneficial to LIC. In the short term it may not get digested to a common man, but in a long run, all that investment which was criticised by the media initially have proven to be the most profitable.
When LIC bought ONGC, there was a huge criticism by media;
“LIC wants to bail out ONGC out of Govt. pressure”,
“LIC is using policy holders’ money to bail out loss making ONGC”.
The Economic Times wrote a controversial news with the headline “LIC playing White Knight” (verbal meaning of ‘White Knight’ – an innocent protector / saviour). This article was highly impactful and indeed discouraged LIC’s Policy Holders to a great extent.
Interestingly, in 2018, the same newspaper wrote that “ONGC is topping amongst the Top 20 high performing stocks in LIC’s portfolio”. They also wrote that ONGC is the most profitable deal LIC has ever made. (Though the newspaper did not publish a single word of apology for criticising LIC when LIC bought ONGC!!)
LIC is a huge corporation having a solid financial standing and holding capacity. When retail investors run out of falling market, LIC can afford to take calculated risk and buy good stocks in large volume at a lower price. Alternatively, when retail investors buys in rising market, LIC may liquidate its stock at a high price and earn a good amount of profits.
Let’s go to little deeper water to understand how LIC makes any investment.
Investment Policy (Stage One):
Section 27 of Insurance Act 1938 gives the detailed guidelines to LIC regarding where to invest, how to invest, in what proportion to invest. Within that same guideline, LIC prepares it’s investment policy and submits it to Govt. of India. Govt. of India approves the same with or without any modification. According to this Investment Policy, there are some procedures laid down and LIC has to follow while making any investment. All the investments made including buying a major stake of any particular company is strictly governed by LIC’s own Investment Policy.
Investment Committee (Stage Two):
When it is assessed that buying a particular stock in bulk at a particular price band will be beneficial to LIC, Investment Dept. of LIC prepares the proposal for that particular deal and places it before the Investment Committee and the Chairman.
It is very interesting to know that apart from LIC’s own expert officers, certain worthy & highly qualified people from outside LIC are members of this Investment Committee. For example, the present Chairperson of HDFC is one of the members of LIC’s Investment Committee. Three years ago Mrs. Chanda Kochhar (Ex MD & CEO of ICICI Bank) was in the Investment Committee. The Finance Secretary of Govt. of India is also one of the Committee members. This means they are not just LIC people who are in the Committee but they are outsiders who are Investment Giants in the industry. There is no need to mention that when a proposal is approved by these investment giants, would have some meaning.
LIC Board (Stage Three):
When the Investment Committee made of Investment Giants approves the proposal, it goes to the LIC Board. There are very eminent personalities who forms the LIC Board.
LIC Board does not approve any proposal with mere majority. LIC Board approves any proposal only when there is a unanimous decision. It means each and every director should approve it, then only the proposal will go to the next stage.
IRDA (Stage 4):
The proposal duly approved by Investment Committee and LIC Board will go to IRDA (Insurance Regulatory and Development Authority) for its approval. IRDA is a Govt. body who controls the entire Insurance sector and matters related to insurance in India. IRDA also has its own Investment Committee and Actuarial Committee which studies the whole proposal systematically. If any proposal which is against the guidelines of IRDA, it does not approve it.
For eg. ‘HDFC Life’ wanted sell its stake to one company, IRDA blocked that deal disagreeing the price factor. HDFC had to withdraw that proposal. If any insurance company wants to sell its stake then there should be a reasonable price band. In many cases it is IRDA who has dictated the Price Band. Later, HDFC came up with another buyer, second time it was denied. Third time the proposal got agreed and went through.
In another case, SBI Life sold its shares to BNP Paribas, the whole deal went through the IRDA.
Any proposal which affects the interest of the stake holders (Policy Holders, Share Holders, Suppliers, Associates, Employees, Society etc.) is dealt very strictly by IRDA. On the LIC’s recent IDBI deal, the IRDA sat for one full day. There was no any other agenda that day except this deal. They went through the proposal and they found it okay. There was no injustice to any stake holders and LIC found to be operating within rules.
When IRDA approves the deal, then only the deal takes place.
After going through all these procedure, how one can say that there is a fixing in this deal? Many a times media has quoted “Why LIC is buying a particular stock at Rs.150/- and why not buying it at Rs.140/-“. But is it a media’s business to comment on the price? No. It is investor’s (LIC’s) decision. It’s investor’s territory & jurisdiction. Investor’s decision may prove right; it may prove wrong also. LIC can also make mistakes. But it is LIC’s discretion to buy a particular stock at a particular price.
Mr. Warren Buffett is called as “The Prophet of Investment” (Nivesh ka Maseehaa). Even he has committed some mistakes. He admitted that he was very late in recognising Information Technology sector as the sector with lots of potentials. The same way, LIC can also make some basic judgmental mistakes. But they are mistakes. They are not scams. Why do we forget that LIC is also run by humans?
When the media criticise each & every deal of LIC, it creates doubt in my mind. By whose direction they criticise the LIC? Are there the forces (companies) who wants to buy the same stock with rock bottom prices (much lower than what LIC offers)? LIC having a huge holding capacity and bargaining power can be the biggest hurdle for such companies. If, somehow, LIC stays away from the deal, they can grab the fortune. Is it the big ‘financial muscle’ of few private sector players who directs the opinion of the Indian Media?
Last year LIC booked profit of 2838 Crores on ONGC stocks (alone) with a growth of 33% over previous year’s profit (Growth of 33% in profit is a huge growth). LIC did not celebrate this phenomenon. Neither LIC cried on the allegation imposed on its character while buying stake of ONGC. LIC felt that it is our job to give maximum profit to the policy holders.
Some of the media commented that IDBI deal will put LIC into liquidity crises. Let say LIC wants to buy IDBI or IL & FS for 10,000 Crores. What is 10,000 Crores for LIC?! This amount is equal to LIC’s 5 days Cash Collection. LIC collects Rs.2,000 Crores every day over the various counters (LIC’s per day revenue). How this small amount can bring liquidity crises to LIC? Money Market closely keep a watch on LIC’s counter collection on day to day basis. They want to know, how much money LIC is going to bring in the market tomorrow morning. Same way, LIC also tracks entire banking industry on daily basis. LIC is interested to know, what will be their hunger (demand) for money tomorrow so that LIC can charge higher rate of interest. Last year LIC made 2.5% to 12.45% monthly weighted average yield out of Money Market. (In simple words, LIC earned minimum 2.5% interest per month to maximum 12.45% interest per month in one single year). Now, is it not a huge profit??
When a layman thinks about the holding capacity, he may think for the 5 years period but when the giant like LIC thinks about the holding capacity, it will think for 50 years tenure. What is right for a layman cannot be right for the LIC and vice versa. Investor has to take calculated risk while investing.
Sometimes back, LIC bought 26% shares of Corporation Bank. Media had criticised that deal also. After that LIC sold its stake of Corporation Bank at very high rate.
I am taking a halt here for this article. In the Part-2 of the same article which is going to be published in the next week, we will discuss how LIC saved the Nation in the events which could have badly damaged the whole Indian Economy. LIC’s role in Satyam Computers’ auction, dispute between Ambani brothers, LIC’s financial strength, LIC’s investment into Railway Bonds and many such macro events we will discuss in the Part-2 of the same article.
To be continued….
