LIC stake in ITC: Courting trouble POWERPOINT
The Bombay High Court is scheduled to hear a public interest litigation (PIL) today, seeking direction from the government and the insurance regulator to frame a law that restrains public sector insurance companies from investing in tobacco companies, besides ensuring that the present holdings of the insurance companies are divested.
While the petition talks about public sector insurance firms and tobacco companies, the issue is actually about Life Insurance Corporation’s (LIC’s) stake in ITC. That’s because public sector general insurance companies together hold just about 5 per cent stake in ITC (they have been progressively reducing their exposure mainly to shore up their books ahead of their proposed listings) and their combined stake in VST Industries is negligible.
On the other hand, LIC holds 16.29 per cent stake in ITC— more than half the combined stake held by insurance companies and SUUTI (Specified Undertaking of the Unit Trust of India). In fact, LIC increased its stake by 2 per cent in February this year.
The issue raised in the PIL is an emotive one — after all, who can deny that tobacco is indeed responsible for nearly half the cancer cases in India and 90 per cent of mouth cancer patients die within 12 months of diagnosis. But the PIL is confusing issues here. No one can deny the basic argument that the usage of tobacco — cigarettes, bidis and other variants — must be discouraged through steppedup deterrent actions such as educating the public on the harm it causes, and steep taxation. Any argument against high taxation on tobacco products does not hold water as such “sin tax” is not just an element of revenue but also a policy tool to guide citizen behaviour.
The gentlemen who have filed the PIL should also engage with the government on measures to curb cigarette smuggling. There has been a 90 per cent increase in consumption of smuggled cigarettes in the past 10 years. India is the fourth largest illegal cigarette market in the world and legal cigarettes account for just 11 per cent of the overall tobacco consumption in the country, with the balance represented by traditional products like chewing tobacco and bidis.
These are issues that need to be debated. But where the PIL has gone off track is to seek court intervention on stopping investments by insurance firms in tobacco companies. There are many reasons why the demand is baffling.
One, the petition has said LIC enjoys exclusivity in the realm of life insurance. That’s not correct as LIC has to compete with about 23 rivals. One cannot ask LIC, which competes with private insurers in the marketplace, to do something that one would not ask the latter to do. There has to be a level playing field. How does a fund manager avoid a good investment bet such as ITC if his performance is benchmarked with his counterparts in other companies?
Second, in this case, LIC is merely acting as an investor and trying to get the best return on its investments so that its 300 million policy holders benefit. The insurance major is not promoting the use of tobacco or even ITC in any way. Also, there has been no equity capital raising by ITC, or other tobacco companies.
Third, the ITC stock was already held by the government through its ownership of SUUTI, and the 2 per cent stake hike in February is not technically a new purchase by the government or its agencies. If LIC has bought ITC stake from the government, the stake is merely shifting from one pocket to another. ITC did not benefit in any way from the sale.
Fourth, ITC has been reducing its dependence on tobacco for quite some time now. Though the company still derives 70 per cent of its profit from tobacco-related business, its net assets employed in non-cigarette business is ~27,680 crore compared to ~5,249 crore in cigarettes as on March 31, 2016. The number of employees is 27,809 and 3,838, respectively. The company has earmarked an investment of ~25,000 crore on 65 projects across many of its non-tobacco business. This shows ITC is using its tobacco profits for growth in other segments such as packaged foods and consumer goods.
In any case, how can a court decide on a perfectly legal investment decision of a company even if it’s a government entity? By that logic, tomorrow anybody can move courts for banning investments in a liquor or a fast food company. Extending similar standards to government would mean that it has to exit from coal, oil, power and many other industries that pollute the environment. It can be nobody’s case that investments by commercial institutions or policy decisions taken by a government should be determined by courts. If that happens, the remedy would be worse than the disease.
Consider the recent court decision on banning sale of liquor within 500 metres of highways. The order came down like a sledgehammer not only on the liquor vends and the hospitality sector but also on the revenues of state governments, on the business of hotels and bars, and the tourism potential of many parts of the country. The courts surely have better things to do.