State-owned insurer keen to get large chunks of blue-chips.

Life Insurance Corporation (LIC) has set aside a corpus of nearly Rs 10,000 crore to buy a part of shares owned by the Special Undertaking of Unit Trust of India (SUUTI). The government has informally sounded out LIC about the impending dilution of SUUTI and the country’s largest investor is all set to pounce on the opportunity, according to people familiar with the development.

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“We will be interested, as these are very good investment options. Funds won’t be a problem as we will be investing more than Rs 15,000 crore in equities in the last quarter,” said a senior LIC official.

For the insurer, it makes sense to buy the huge chunk of blue-chips at minimum impact cost. If it tries to accumulate such quantities of shares in the open market, the share prices will spike, making the acquisitions expensive.

Analysts see this as a preferred solution for the managements, too. Of these three companies, Larsen & Toubro and ITC do not have any identifiable promoters. So, a dilution by SUUTI could potentially put the managements of these companies at risk in case these shares are picked by a hostile strategic investor. However, if LIC, a financial investor, steps in, the status quo will not be disturbed.

According to insurance sector rules, an insurance company can invest in up to 10 per cent stake in an investee company. However, LIC has been granted a special exemption in certain cases, including the above three companies. “We have to take permission from the regulator to increase our holdings to more than 10 per cent. But, that won’t be a problem as earlier too the regulator allowed it under special circumstances,” the official said.

LIC is already the single largest shareholder in L&T with 19.15 per cent and the second largest shareholder in ITC with 12.5 per cent. In Axis Bank, it owns 9.8 per cent. With the recent changes in takeover rules, the life insurance behemoth can acquire up to 24.99 per cent in these companies, without triggering open offer obligations. According to a BS Research Bureau analysis, LIC has the headroom to buy 5.85 per cent more in L&T and 12.48 per cent more in ITC. In Axis Bank, since it is part of the promoter group investors, along with SUUTI and state-owned general insurance firms, it can technically buy the entire 23.57 per cent owned by SUUTI through an inter-se transfer.

However, LIC might settle for a smaller increase in each of the companies, deploying funds up to Rs 10,000 crore in the process, officials said.

The government had planned to raise Rs 40,000 crore through the disinvestment programme. However, due to tough market conditions it could not sell shares even in large-cap firms such as ONGC and SAIL. As an additional route to boost divestment proceeds, Mumbai-based brokerage ICICI Securities had suggested dilution of the government’s stake in these three blue-chips, which are professionally managed, have strong balance sheets and are better valued by the market. This move is being considered as part of the revised divestment plan by the Union Cabinet.

In the current financial year so far, LIC has invested Rs 25,000 crore in equities, way short of its target of Rs 40,000 crore for the year. LIC's total investment corpus stood around Rs 11 lakh crore as on March 31, 2011, of which 20 per cent, or Rs 2.2 lakh crore, was in equity. During 2010-11, LIC invested Rs 1.96 lakh crore, of which Rs 43,000 crore was invested in equities. In the current financial year, the insurer has plans to invest a similar amount in equities.

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