Why does LIC invest into loss making companies? (Part–2)

Last month in the Part 1 of this article we discussed the procedure which LIC has to follow while making any investment including buying major stake of any company. We learnt that how it is impossible for any insurance company to bypass this procedure. We saw that how LIC rules the money market through its unmatched holding capacity & bargaining power. We also saw that how media misled the public when LIC bought the ONGC. Today, ONGC is the most profitable stocks in the LIC’s portfolio.

(Please click below link to read Part 1 of this article: https://malaychitalia.home.blog/2018/12/14/why-does-lic-invest-into-loss-making-companies-part-1/)

Now let us discuss one scenario. For instance, LIC wants to enter into the banking business. Indeed, LIC is capable of starting its own bank. But starting a whole new bank requires a huge infrastructure and expertise. It may dilute its attention from Life Insurance business also. Instead, it can buy an existing bank to make its presence in banking business.

Now, is it possible for LIC to buy SBI? No. SBI share is highly priced. It will require lot of money to buy SBI. Buying IDBI is the easiest route by which LIC can enter into the banking business. So this could be the golden opportunity for LIC.

There is a very famous statement made by the legend himself which explains everything.

“Buy good companies during their bad times!”

                                                         – Warren Buffet

When Mr. Ratan Tata bought Corus (Corus Group plc, London, U.K.), it was 8 times bigger than Tata Steel. It was making losses for last 10 years. He could not have bought Corus if it would have been a profit making company. The same was the case with Jaguar and Land Rover, when Tata bought them. Both were good companies but making accumulated losses continuously for 8 years. Tata bought them and today these companies are adding elegance to Tata as if peacock feather adds elegance to a crown. No media raised the question mark against these deals. There were no such headlines in the media, “Investor’s money badly used by Ratan Tata!!”

Let me share one more incidence. One fine morning, when Mr. Ramalinga Raju declared irregularities in Satyam Computers, the stock exchange hit the lower circuit thrice on a single day. The Stock Exchange had to be closed for the day. The ghost of crises ruled the exchange for continuously 3 days. Satyam share valuing Rs.180/- came down to Rs.24/- in just 3 days. LIC was holding 11% of the Satyam Computers. Media again criticised LIC. It was 11% stake of Satyam Computers which LIC was holding. It was not LIC’s 11% which was invested into Satyam. But media went on to take a negative stand on this. To save its own stake, LIC started negotiating with the Govt. behind the curtains and convinced them to auction the company. LIC intervened and negotiated with the Mahindra to take over the Satyam Computers. (At that time, LIC was holding Mahindra’s 9% stake also. LIC was a major institutional holder of Mahindra). Before that, Mahindra had no exposure in the IT sector.

That’s how Tech Mahindra was born. Satyam Computers was a good company, having 60,000 employees and good-big orders. A share of Rs.180/- Tech Mahindra bought at Rs.58/-. Today, value of this stock is Rs.704/- per share. (At that time also, LIC bought few shares at 58/- which is valuing today Rs.704/-. Media had criticised that deal also) LIC saved its money (11% stake of Satyam) by intervening in this deal. LIC also saved the nation and the economy. This tragic event could have easily damaged the economy very badly.

This has now become a fashion for the media to criticise LIC whenever LIC buys some shares at a lower rate. Shares worth Rs.180/- of a good company available at Rs.58/-, why not to buy? LIC must have calculated pros & corns, and then decided to go for it. Now the result is revealed.

Let me share another incidence where LIC played a major role. After the demise of Dhirubhai, there was dispute between Mr. Mukesh Ambani and Mr. Anil Ambani, which lasted for quite a long time. Suddenly one day the press note came that “Kokilaben Ambani intervened and settlement took place” Where was she when the dispute lasted for so long time? Had she gone to Himalaya? She could have solved this matter earlier also. No… it was LIC who made them sit across the table and used its heavy weight to get settled the issues. The heavy loss of people’s money was taking place on day to day basis in the process of this dispute. Ambanis had to settle the issues, if at all they wanted LIC to participate in their future ventures. This is the power of LIC!

Fact: When news got spread about the LIC buying IDBI, its (IDBI’s) share gone up by 16%. Just by spreading of news, people starts buying the shares. Imagine, how much trust LIC has gained in the people’s mind!! This is the power of LIC!

We all invest into Mutual Funds. Each fund is having its investment into 100 to 150 stocks. Some of them gives 18% CAGR, while some of them makes a loss too. Do we ask the Fund Managers “Why don’t you fully invest into stocks giving 18% CAGR, why do you investment into loss making stocks?” This is what exactly a Fund Manager does. In some purchases, he makes the kill; while in some purchases, he is bound to make losses. But he has some procedures to pick the stocks. He does not pick the stocks wildly by closing his eyes. Same way LIC has its own system to buy stocks; many times it make profits, sometimes it may end-up into losses.

Last year LIC made a profit of Rs. 16,000 Crores on the stocks (only out of share market) with the asset base of Rs. 35,000 Crores. Do you think, close to 50% profit ratio is a good performance? Yes, indeed. This is the power of LIC. And it includes all the criticism in the deals like ONGC, NTPC, BHEL, Hindustan Aeronautic Ltd. etc.

IL & FS is a good company but recently going through a heavy cash crunch. If it is provided with the liquidity, it will flourish again. LIC will not let down IL & FS. Is it out of Govt. pressure? No way! LIC wants to save its money. LIC is a major institutional holder in IL & FS. LIC may not be very concerned about IL & FS and its other investors, but LIC is certainly concerned about its own money which is invested into IL & FS. LIC will surely come out with many measures to save, and these activities will be profitable also.

LIC is exposed to 4 Lakhs Crores totally in the Share Market. If the index starts to fall down due to any undesirable event, it has to take various measures to stop it, otherwise it may prove fatal. By investing another Rs. 300 Crores, if I am able to save my 4 Lakhs Crores, why not to do it? If it would have been a small cap company, LIC would not have been bothered much.

Here, LIC has got a dual role to play. Sometime it invests considering potentials of a particular stock to give good profits, sometime it pumps more money to save the already invested money.

Suppose LIC does not save IDBI, and IDBI collapses; what could be the consequences? What will happen to Indian Economy? In the world market, India’s entire rating will come down. No foreign institute, foreign company or individuals will invest into India. No one will give value to India’s 10 year bonds. By saving IDBI, LIC has saved the Nation. LIC officials might be well aware about the media’s negative approach, still they took the call in the welfare of the Nation & the economy.

Fact: LIC is the only company in the world which has made profits continuously for 62 long years! It has never declared a loss! It is despite of the all the criticism made by the media for various deals.

Not only that, in changing market environments, recessions, share market booms and crises, real estate booms & crises, falling of interest rates, changing Governments, political instabilities, after swallowing all these events, LIC has consistently made profits over last 62 years.

LIC is having a Life Fund of 30,00,000 Crores. Not only that, every day LIC is adding Rs.2000 Crores through cash collection. Is it a joke handling this amount? People have burned their hands while handling just 500 Crores funds. To allocate such a huge amount is a big task. In between, there are Maturity Claims to be paid, Death Claims to be paid, Provisions to be made for future claims, Contingency provisions & other reserves, Distributing Bonus, all these tasks are also to be justified. If reserves are not kept sufficient, it may bring cash flow crises, if reserves are made more than optimum, LIC may lose on its investment income which will lower down the profits. Let me inform you, LIC is doing master piece of its job. If someone thinks that he or she can do it a better way, they might be right; but this is also not a poor performance.

Fact: As per the Section 27 of Insurance Act 1938, LIC is allowed to invest into Equities to the extent of 25% of its Life Fund. But LIC has set its own boundaries. It has never increased its exposure to the Share Market more than 20% of its Life Fund. Presently it is operating around 19% level.

Another allegation by media was, LIC buys the companies without taking commanding position. LIC has its active presence in all that boards of the companies, in which LIC holds the stake. LIC may not appoint the Executive Director for those companies because, LIC may not have that exposure & experience in the respective fields. But LIC do have its active presence in all the boards.

LIC’s investment in Railway Bonds: There is one more allegation on LIC that it has given 1.5 Lakhs Crores to the Railways out of Government pressure, and LIC will never be able to recover this amount.

Here, I would like to mention that LIC has subscribed bonds worth 1.5 Lakhs Crores from Railway. This is not the first time LIC has funded the Railways. It has funded many times in the past and LIC has already recovered those amounts from Railways. This is to draw the attention of the reader that LIC has not invested in to equities of Railway. So LIC need not to worry about losing its money. LIC has purchased the Bond and it is backed by Govt. of India. Therefore the fund is going to come back in any situation. Not only that, LIC has purchased these bonds at a very good rate of interest. If Railways would have floated these bonds in the open market, any individual would have purchased these bonds.

Here very logical question arises; why Railway did not issue bonds in open market and offered it to LIC only? The reason is Railway was not sure whether the bonds will be subscribed fully if they were floated in the open market. Railway was well aware that there is only one buyer in the market who has the capacity to buy the bonds fully and provide it with the required amount; and that is LIC. Railways, therefore, offered high rate of interest to LIC so that LIC subscribes it fully. On the other side, LIC got a very good deal. LIC grabbed the opportunity. Lending money at a high interest is a part of LIC’s business.

LIC’s firm financial capacity to fund huge projects gives LIC an unmatched bargaining power. LIC is the only company who is able shell out such a huge amount at a time. That’s where LIC gets that extra advantage of getting high interest on the bonds. These bonds are freely tradable in the market so LIC can sell them also at a good rate. The bonds which are guaranteed by the Govt. of India, if LIC is getting at a very good rate, it’s a rare opportunity, and LIC grabbed it.

There is an allegation that despite of Railway is running into losses, LIC subscribed its bonds. Companies making losses is a usual phenomenon. Apple Computers is valuing 1 trillion dollars today. It is the first company in the world ever to reach at this stage. Few years back it was also running in to losses. If I invest only into profit making companies, there will be anti-selection. I might end-up into losses. Buying Railway bonds is a very profitable deal for LIC.

Fact: As per the guidelines of IRDA, Insurance companies are allowed to have NPA (Non – performing Assets) up to 5% of its Life Fund. But LIC is operating at below 2% NPA! Is it not a fabulous performance by the giant?

Coming to the conclusion, LIC is the great corporation practicing highest ethics & integrity in its day to day business. The Indian media is known to throw garbage on the face of any individual or institute with the great character, but as an alert citizen it is our duty to find out the truth and stay with the morally sound & ethically strong being.

Jai Hind!