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Irda wary of systemic risk over LIC's stake increase plan

LIC Act permits it to take its stake to 25 per cent, while the IRDA Act, which came into effect much latter laid out the 10 per cent cap regulation

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Though the finance ministry has given green signal to Life Insurance Corp (LIC) for increasing its stake to more than 25%, the insurance regulator is wary of systemic risk due to the move.

While insurance regulator has mandated that insurance companies should have more than 10% stake in a particular company, but insurance behemoth have more than 10% stake in various stocks like L&T, Tata Steel, Axis Bank, Punjab National Bank, Shipping Corporation of India and in unlisted firms like UTI AMC and IL&FS.

Insurance industry officials indicate that Act permits it to take its stake to 25%, while the IRDA  Act, which came into effect much latter laid out the 10% cap regulation.

However, the finance ministry is of the view that it has precedence over the insurance regulator for deciding the equity investment cap of India's largest insurer. However, industry players said that this would lead to unnecessary contradictions and conflicts between the three entities.

Since the 10% cap came into force in 2008, LIC has been lobbying for this relaxation, as it has exhausted the limit in various blue-chip stocks. In a recent conference, LIC chairman D K Mehrotra said that the present 10% cap restricts participation in equity market and that they have presented their case to the regulator.

"Presently there is a lack of headroom in good investable companies due to the existing cap. We have spoken to the regulator in this matter and we would be happy if the cap is increased to even 15% or 20%," Mehrotra had then said.

Insurance Regulatory and Development Authority (Irda) had also expressed its reservations about LIC's equity exposure in companies, especially public sector firms. Though has not asked LIC to pare its existing holding in companies, where it holds more than 10%, the insurer was asked to follow the 10% cap for fresh investments.

"Prima facie, LIC holding more upto 25% stake in companies shouldn’t matter. However, for better vibrancy of secondary capital markets, and to facilitate better price-discovery, listed companies should not have concentrated investors. Additionally, LIC would unnecessarily be subject to various pressures by companies and other quarters, especially in times of special situations (mergers, acquisitions, etc.). Companies would then work towards pleasing just LIC as the large investor, which isn’t healthy for corporate governance. Institutional investors should be independent in their investment decisions, which hasn’t been the track record," said Shriram Subramanian, founder and managing director, InGovern Research Services.

A senior official at Life Insurance Corporation of India (LIC) said that though they are not aware of the investment cap being raised to 25% for LIC, he added that the government has confirmed that the provisions of Sections 43 (1 and 2) will be of significance. "As of now, the position is that it has been reiterated that the LIC Act is a special act and hence has precedence over the other acts," he said.

According to Section 30 A of the LIC Act, the exclusive privilege of carrying on life insurance business in India by the Corporation shall cease on and from the commencement of the Insurance Regulatory and Development Authority (Irda) Act, 1999 and the Corporation shall, thereafter, carry on life insurance business in India in accordance with the provisions of the Insurance Act, 1938. Post the insertion of this section, the general belief was that LIC was under the purview of the Irda and would follow its guidelines.

Further, Section 43 (1) of the LIC Act mentions that certain provisions of the Insurance Act, 1938 would be applicable to LIC Act. However, Section 43 (2) of the LIC Act mentions that the central government can bring out notifications as and when necessary, to modify the requirement of making LIC follow the above said provisions of the Insurance Act. This would imply that the government could change these provisions, as per their discretion.

Ashvin Parekh, National Leader-Global Financial Services, Ernst & Young added that though were merits and demerits in increasing equity investment cap of LIC, he said that there should be a level playing field for both private and public sector insurance companies in India. "Regardless of the institution concerned, let there be an equal and level playing field for both private and state-owned insurance players in the country," Parekh further opined.

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