Don't use LIC to prop up di­vest­ment

The Pak Banker - - Front Page - Mo­han r. Lavi

IF the Re­serve Bank of In­dia (RBI) is the lender of last re­sort for the In­dian Government, the Life In­surance Cor­po­ra­tion of In­dia (LIC) with some prod­ding from the Government that owns it seems to be im­pos­ing the ti­tle 'saviour of last re­sort' on it­self. In March 2012, LIC bailed out ONGC's share auc­tion af­ter it re­ceived tepid re­sponse from in­vestors. LIC made a re­vised bid for 12 crore shares in the nick of time af­ter a bro­ker's mis­take led to the re­jec­tion of its ear­lier bid.

The auc­tion had ear­lier re­ceived bids for just 29.22 crore shares against 42.77 crore shares on of­fer through the in­sti­tu­tional place­ment pro­gramme route ap­proved by the Se­cu­ri­ties and Ex­change Board of In­dia.

More re­cently, LIC and other state-owned fi­nan­cial in­sti­tu­tions bailed out Hin­dus­tan Cop­per's (HCL) of­fer for sale (OFS) is­sue through which the Government sold 4 per cent to meet part of its am­bi­tious an­nual di­vest­ment tar­get of Rs 30,000 crore. Whether the in­surance gi­ant can act as the saviour of dis­in­vest­ment is it­self a mat­ter that needs de­tailed de­bate.

The Rs 30,000 crore dis­in­vest­ment tar­get for this year was fixed de­spite a flop-show last year when ac­tual re­ceipts were an abysmal Rs 13,894 crore, as against an op­ti­mistic wish-list of Rs 40,000 crore. Pru­dence would have de­manded that the Government keep the tar­get low in the cur­rent year.

The tim­ing of the is­sues seems to be putting spokes on the wheel of dis­in­vest­ment for the Government. De­spite an­nounc­ing a tar­get in the an­nual Bud­get, the De­part­ment of Dis­in­vest­ment ap­pears to wait till eternity to kick-start the ac­tion. If dis­in­vest­ment is con­sid­ered to be a pri­or­ity, it should be a con­tin­ual pro­gramme, and the present stance of the Government to wait for months and start the process to­wards the year-end, think­ing that the bud­geted tar­gets will be met, will not im­press many.

In the re­main­ing months of the fis­cal year, it ap­pears un­likely that the tar­get will be met.

Pric­ing and tim­ing of the is­sues is some­thing that the Government has not been very good at.

Agreed, the Government is not sell­ing all the fam­ily sil­ver (or Navarat­nas, as the Government would like to call them), but ex­pect­ing a pre­mium for each is­sue is cer­tainly some­thing that a luke­warm mar­ket will not rave too much about.

The re­sponse to the HCL is­sue was poor, with the bids coming at a weighted av­er­age price of Rs 156.56, slightly above the set floor price of Rs 155 a share and 41 per cent less than the clos­ing price on Thurs­day.

This re­sponse is de­spite the fact that the is­sue was priced at a sub­stan­tial dis­count to the traded price of the stock. LIC, along with pub­lic sec­tor banks, ap­par­ently put in the ma­jor­ity of the or­ders in the last hour of bid­ding. The Government has found it­self at the wrong side of the de­bate sev­eral times when it came to pric­ing is­sues. In the case of pri­vati­sa­tion of Maruti way back in 2003, the Government faced flak for over-pric­ing the is­sue.

In many fol­low-up pub­lic of­fer- ings, the Government kept de­fer­ring the is­sue, stat­ing that the tim­ing was not right, thereby mak­ing the mis­take that many have made ear­lier.

The Dis­in­vest­ment De­part­ment should stay away from look­ing at an ap­pro­pri­ate time to do a sell-off, and should also per­mit proper price dis­cov­ery for the unit it would be ap­pro­pri­ate to leave this to the mar­ket. They could make a start with the few heavy­weight sell-offs, such as NMDC, that are due soon.

In a last-ditch at­tempt to mop up re­sources through dis­in­vest­ment, the Fi­nance Min­istry has upped the limit for LIC to buy eq­uity stakes in com­pa­nies up to 30 per cent, from the present 10 per cent. The In­surance Reg­u­la­tory and Devel­op­ment Author­ity (IRDA) has strongly op­posed the in­crease in limit, say­ing it would not be pru­dent, and point­ing out that large ex­po­sures to in­di­vid­ual com­pa­nies could pose risks to LIC. IRDA is also con­cerned over any likely neg­a­tive im­pact on LIC's fi­nan­cials from its heavy an­nu­ity pay­outs. While the LIC go­ing un­der is an un­think­able propo­si­tion, and is as good as the Government go­ing down un­der, the DoD should en­sure that it does not keep us­ing the LIC as the saviour of last re­sort.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.