LIC Must Be Granted Relaxation in Investment Norms in Measured Doses

There is a case for giving more headroom to Life Insurance Corporation of India (LIC) in its investment decisions provided they are open to greater public scrutiny.

LIC wants to be allowed to take equity stake of up to 25% in a company.

Insurance Regulatory and Development Authority’s (IRDA) existing norms on prudential investment require that all insurers should cap such exposure at 10% of their fund value or 10% of an investee company’s equity, whichever is lower.

There is a case of giving LIC more headroom through a policy of linking such flexibility to the size of funds managed, although the extent of liberalization should be pegged at a level lower than the 25% limit sought by LIC.

Currently, LIC manages roughly Rs 200,000 crores of equity assets which is more than the sums managed by the entire mutual fund industry in India. Therefore LIC is justified in seeking greater leeway in making investments. While, its sheer size renders the 10% ceiling computed on the total investible funds and irrelevant criterion, the alternative cap of 10% on the paid-up equity capital of an investee company would be breached in practically in every listed company. Already, LIC, by virtue of its position built up over years, has been in the breach of the regulator’s investment cap, in terms of percentage of Investee Company’s capital.

But any relaxation must be granted in measured doses, with safeguards to make sure it does not get used to the detriment of the policymakers. For that Irda must insist on much greater transparency and accountability from LIC on its portfolio, investment choices and performance of equity assets.

Regulatory caps of how much an insurer or mutual fund may invest in individual stocks, business groups or sectors are meant to protect the investors against the risk of concentration. The 10% investment cap was imposed only after the dotcom crash of 2000, when many mutual funds lost money investing up to half of their portfolio in one or two technology stocks.

These limits also curtail fund managers from misusing their discretionary powers to favour any particular company or group.

Hence, if LIC wants special exemption from prudential investment norms then it has to adopt better disclosure practices and demonstrate to the regulator and policyholders that it is making optimal risk-return trade-offs.

This is specially so in the light of its recent record of bailing out the government, whenever government has chosen to raise fund through disinvestment. Such rescue acts have raised the question of whether LIC’s investment decisions are dictated more by its policyholder’s interest or needs of its exchequers. Now it is up to LIC to put to rest to such apprehensions.