Suuti stake: LIC faces investment cap hurdle

The insurer has hit the 15% equity ceiling in L&T, ITC & Axis Bank

Life Insurance Corporation (LIC) will have little role to play in the mega equity stake sale of the Specified Undertaking of the Unit Trust of India (Suuti), the process for which has been initiated by the government.

This is because the state-owned insurer has already exhausted most of its investment limit in Larsen & Toubro (L&T), ITC and Axis Bank. About 95 per cent of Suuti’s holdings in value terms are in these three entities.

According to Insurance Regulatory and Development Authority of India (Irdai) norms, an insurer, including LIC, can hold up to 15 per cent stake in a company.

LIC’s holding in L&T is currently at 15.7 per cent, while in ITC and Axis Bank its shareholding is 14.4 per cent and 14.61 per cent, respectively. Owing to legacy issues, LIC is in breach of the cap in the case of L&T, MTNL and Corporation Bank.

“According to regulations, an insurer can take exposure in a single investee company up to 15 per cent of the outstanding equity shares. These are rules all insurers, including us, have to follow. However, if the government wants us to participate, it might make some provision,” said an official close to the development.

There have been talks to increase LIC’s investment cap to 30 per cent. However, no such provision has been made yet. In the meantime, Irdai has maintained that all insurers have to adhere to the investment cap.

In 2014 when the government had divested nine per cent stake held by Suuti in Axis Bank, LIC had picked up about a fifth of it.

Market experts say there will be enough demand for shares of L&T, Axis Bank and ITC and the government might not need any assistance from LIC. “There will definitely be demand if the government decides to divest. L&T, Axis Bank and ITC are excellent stocks,” said S P Tulsian, an independent investment expert. However, some believe LIC’s participation might be warranted for reasons other than bailout.

“There is a possibility that the government might need LIC to participate not as a bailout, but because it may not want the stake to go to other shareholders. In that case, the government might have to consider raising LIC’s investment ceiling,” said an investment banker.

“L&T, Axis Bank and ITC aren’t promoter-owned companies. The government has in the past been wary of disinvesting Suuti holdings in these companies with the fear that someone might gain control,” the banker added.

Meanwhile, the government will hold a meeting on Friday to address queries from investment bankers intending to help the government in the stake sale. Last week, the government had floated a request for proposal to appoint three investment bankers.

Investment bankers said before placing their bids they would seek clarity.

“Suuti holds stake in about 50 companies. However, about 95 per cent of its holdings in value terms are in L&T, Axis Bank and ITC. We would like to know the companies the government intends to divest in and the total divestment target through Suuti. If it’s mostly going to be smaller companies, we may not be interested,” said another banker, who intends to attend Friday’s meeting.