Government’s Divestment Plan May Leave LIC With Little Room To Manage Investments In PSUs
LIC may not be able to sell investments in PSUs as government looks to pare holding.
The Life Insurance Corporation of India and other public sector companies, for now, won’t be able to lower holdings in state-run peers where the government intends to bring its stake below 51 percent, according to a senior official.
Such companies may not be able to sell their shares for some time to maintain an agreed-upon limit of public-sector holding, the official said on the condition of anonymity as details are not public yet. The shareholding limit the government and government-backed institutions together will continue to hold will be decided by the cabinet, he said.
Finance Minister Nirmala Sitharaman, in her debut budget, said the government has sought to redefine its 51 percent ownership limit to include LIC and PSU ownership as well. This will allow the government to reduce its direct stake to below 51 percent as long as LIC or state-owned entities hold enough for the aggregate stake to be above 51 percent.
The move is aimed at meeting the divestment target of Rs 1.05 lakh crore for 2019-20 to bridge the budget deficit. But that raises the question if the decision will impact LIC and other PSUs’ independence to manage their investments.
The government holds close to 51 percent in Bharat Electronics Ltd., NTPC Ltd., BEML Ltd., Bharat Petroleum Corporation Ltd., Indian Oil Corporation Ltd., National Aluminium Company Ltd., and may bring down its stake in these companies, the official quoted earlier said.
Other companies in which it might lower its stake below 51 percent are MOIL Ltd., Engineers India Ltd., Container Corporation of India Ltd., GAIL (India) Ltd, according to the official. These were dropped from the CPSE ETF as the government's stake would have otherwise fallen below 51 percent.
LIC holds stakes in all these state-owned peers.
TT Ram Mohan, professor of finance at Indian Institute of Management-Ahmedabad, said it’s rare that LIC and PSUs holding stake in other state-owned entities sell all of that at one go, except where the value of shareholding is small. Such investments are treated as long-term strategic investments, and not as traded assets, he told BloombergQuint.
According to NR Bhanumurthy, professor at National Institute of Public Finance and Policy, “This is not a new thing.” This happened in the past as well when LIC bailed out IDBI Bank, he said.
LIC has turned into an investor of last resort for the government. The state-run insurer bought controlling stake in IDBI Bank when close to a third of its assets were stressed.
Any agreement not to sell stake in public sector companies will impede LIC’s flexibility to take investment decisions, said Amit Tandon, managing director of Institutional Investor Advisory Services. Given that LIC and the government will have to hold up to 51 percent where their joint holding is at 51 percent threshold, LIC will not be able to monetise its investments, Tandon told BloombergQuint.
Emailed queries to LIC didn’t elicit a response.
The government will hold talks with LIC and other PSUs that hold stake in state-owned peers about how it plans to go ahead with divesting its holding, the official quoted earlier said.