Investor of last resort

LIC's bailout of IL&FS makes little sense

Yet another troubled company will be bailed out by Life Insurance Corporation of India (LIC), India’s largest insurer. The infrastructure major Infrastructure Leasing and Financial Services or IL&FS will see a steadily larger role for LIC in its operations and financing. IL&FS also has a maze of closely held companies which, like their parent, are mired in debt. Yet it is systemically important, and thus it is supposed it needs propping up — especially since it has struggled since 2011 to make even a small profit. LIC, which owns about 25 per cent and is IL&FS’ largest shareholder, may be called upon to invest more in the company after the infrastructure lender’s board approved a plan for a Rs 45-billion rights issue and liquidity support of Rs 35 billion from lenders. 

The question, however, is this: Even if IL&FS is important to the Indian economy, why is LIC taking a role? After all, it is policyholders’ money — more than 200 million of them. They have provided the money to LIC in trust, in the simple expectation that the insurer will invest it for them as best it can and return when their families need it the most. Instead, a part of that money is being invested in an entity, which has been struggling to bring down its debt and its efforts to raise cash and improve operations of group companies have so far not been very successful. 

Nor is this the first time a debt-ridden entity is being rescued in this manner. After all, recently it was announced that LIC would put Rs 130 billion of policyholders’ money into IDBI Bank. While the government has declared in Parliament that the LIC board considered IDBI Bank a “sound business proposition”, few others will have thought similarly. However, it does get the worst non-performing assets (NPAs) in the business — Rs 550 billion officially, with another Rs 600 billion that are stressed – off the government’s own hands. In other words, policyholders’ money has been shifted to make the government’s holdings look better. And, of course, when it comes to the disinvestment programme, LIC has been a stalwart: It has bought steadily large amounts of each public sector company of which the government has sold off slices. It is, in effect, underwriting the disinvestment programme, and policyholders’ hard-earned money is going to fill the fiscal deficit so that the finance ministry can look a little less profligate. 

Altogether, this charade does not just shortchange hundreds of millions of honest citizens who have reposed their faith in LIC; it also reveals the government’s complete unwillingness to let finance work in the manner it actually should. Governments should not dip into the populace’s pension money for their own needs of the moment. That capital should be responsibly managed, seeking appropriately safe and remunerative projects. In the end, this is a question that must be asked by the body whose responsibility it is to police LIC on behalf of the common citizen. That body is the insurance regulator, the Insurance Regulatory and Development Authority (IRDA). Where is the regulator in all this? How has it acquiesced to these worrying purchases? The questions, unfortunately, have remained unanswered.