LIC - dancing to the tunes of the government

There is a saying ' If you buy what you don't need, you will be forced to sell what you need'. In case of Governments it should be rephrased as ' if you spend on what you shouldn't, you will be forced to sell what you should be owning'.

This perfectly applies to Government of India. To get out of sinful subsidy disease now it has resorted to sell it's Navaratna's or the most valued Public Sector Companies like ONGC, NMDC, COAL India etc. in stages. The proceeds go out to dole out subsidy instead of creating infrastructure. At this rate our national institutions may not last long. 

There is another angle to this whole mismanagement !!!. Government wanted an exhorbitant price for stake sale of Public Sector Undertakings. Obviously the market is in no mood to buy them. ONGC, one of the most valued company of India did not find great takers for Rs. 290/- per share. This is because of the rate offered being higher than market rate.  

Taking note of dull demand for these shares, New Delhi yelled for help  from LIC to save its face. LIC on it's part (being  arm twisted ) has always been obliging. It gobbled up the left over shares worth thousands of crores.Is there an investment rationale behind this move of LIC? Obviously not !!!  

Is this the first time LIC did it ? Certainly not !!!! It repeats like the same script of a Bollywood cinema year after year. A glance through the statistics of past years throws up stunning revelations !!! 

According to data compiled by the BS Research Bureau, LIC has invested around Rs 12,400 crore in seven recent divestment issues since 2009, accounting for a quarter of more than Rs 45,000 crore through public offers in the past two years. The BS Research Bureau compiled the data from the quarterly shareholding filings of 13 state-owned firms which participated in the disinvestment programme since 2009. 

These holdings are worth around Rs 9,379 crore at current prices. On a cumulative basis, this investment has seen an erosion of 24.5 per cent till the first week of the current month, resulting in a notional loss of Rs 3,038 crore. This is excluding first week's last-minute investment in the Rs 12,766-crore offer for sale of ONGC shares. 

Unless there is a dramatic turnaround in the markets, these losses will eventually get passed on to the policyholders who have purchased insurance policies and unit-linked investment plans from LIC. LIC has been investing money collected from individuals in savings and insurance schemes, buying huge chunks of government shares in the disinvestment programme.

While the government insists that the institution is investing by its "investment rationale", there are not many takers for this theory. Further, the results produced by the so-called "investment rationale" speak for itself. While the companies it had taken big bets on have seen their share prices tumble, at least four public offers the insurer avoided have performed very well.

Of the seven companies LIC bought stakes in, six were in the red. The biggest losses came in investments such as Shipping Corp (50 per cent), PTC India (41 per cent) and NMDC (39 per cent). In terms of absolute losses, the NMDC investment saw the biggest erosion of Rs 2,293 crore, followed by Rs 654 crore lost in NTPC. SJVN (a mini ratna), has lost a quarter of its value since its public issue.

LIC did not buy shares in the biggest and most successful public issue of the country, Coal India, which has gained 35 per cent since. Other successful issues such as OIL India, Rural Electrification and United Bank of India, which have given decent returns to investors, were also inexplicably shunned by the country's largest institutional investor.

On the contrary, these issues were lapped up by foreign institutions and private sector funds, who have laughed all the way to the bank. LIC has been the lender of last resort for the government's divestment programme ever since it began in mid-2009.  

The first crisis call came to LIC in early 2010, when the Government was pushing the sale of NTPC through a follow-on public offer. The rescue story continued as the insurer picked over 168 million shares in the NMDC FPO, steeply priced at Rs 300. Both these shares were trading much below the FPO levels at around Rs 178 and Rs 184, respectively at the end of the first week. 

In it's enthusiasm to please bosses in Delhi and act as a saviour for government, LIC is clearly showing signs of caring a damn for the interest of policy holders.

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