After loan scam, LIC becomes cautious on equity investing

Routes large orders through brokerages of public sector entities.

Life Insurance Corporation of India (LIC), the largest domestic financial institution active in the equity market, appears to be in cautious mode.

Institutional dealers empanelled with LIC say block deals have become rare. Most large transactions are being done through the brokerage arms of institutions partly owned by public sector entities.

The dealers say the insurance major is playing safe after the housing finance scam. On November 24, the Central Bureau of Investigation arrested eight people, including LIC Housing Finance CEO R R Nair and LIC Secretary (investments), Naresh K Chopra, for allegedly giving loans to private builders after taking bribes. There is also a buzz that the equity investments of LIC are under the scanner.

“After the bribe-for-loan scam, we haven’t really got any big trades from LIC,” said an institutional dealer with a domestic brokerage empanelled with LIC. “The information that we have got is that it is placing big orders mostly with the brokerage arms of government entities like IDBI (IDBI Capital) and SBI (SBI Capital Markets). It is relatively safer to trade through those entities, given the current environment,” he said.

According to a section of the dealers, LIC has also become selective in terms of stocks. Apart from the liquid counters, LIC is mostly looking at listed public sector companies, they say, adding that illiquid stocks are now on the “avoid” list.

“LIC was a favourite among promoters looking at placement of shares,” said another institutional dealer, on condition of anonymity. “All that has changed, with the insurance company becoming more selective.” Adding: “In the past, LIC has bought shares directly from many promoters, including that of a shipping company and a couple of Gujarat-based diversified business groups. There is, however, nothing unusual in LIC going slow on investments in the context of some recent news flow. Also, the overall activity in the market has gone down in the last couple of weeks.”

Recent months have seen the insurance major restructuring investment strategy through its empanelled brokers. It is believed that LIC has been trying to streamline operations by bringing down the number of brokers through which it trades in the equity market. The number of empanelled brokerages is estimated around 150.

In August, LIC wrote to its empanelled brokers, seeking data on research recommendations for the past 17 months. LIC wanted to review the recommendations and the relative return from these stocks compared to the benchmark, the Sensex. Some months prior to that, it slashed the brokerage fee from 15 basis points (bps) to 10 bps.

According to brokers, the average transaction size for LIC executed by most empanelled entities is Rs 30-40 lakh. For larger brokerages, the ticket size is around Rs 1 crore; the biggest gets trades worth a little over Rs 5 crore.