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Amidst the focus around the shoddy performance of credit-rating agencies, what hasn’t been spotlighted is the uncertain role of the Life Insurance Corporation in bailing out poorly-governed companies – as the single biggest shareholder in ILFS, it is grandstanding that “ILFS will not be allowed to collapse,” and now its majority stake in the troubled IDBI. The life insurer has a securities exposure of more than 26 lakh crores. It commands about 12% of the stocks of ITC and is also one of the biggest shareholders in Reliance, L & T, ICICI, Yes Bank, and ILFS amongst others.

 While from the viewpoint of heft in the financial market this is commendable, this also raises some pertinent questions: LIC’s ability to safeguard citizen interests in the event of an extreme market downslide, LIC’s stake in tilting governmental policy towards an industry whose product line may not be sustainable (cigarettes in the case of ITC, hydrocarbons in the case of Reliance) and the cover of congeniality it provides to the image of a company even when its financial parameters may be faltering. It is indeed remarkable that LIC should have held as much as 25% of the equity of ILFS, a company that undertook prolific downstream engagement – spawning 348 entities in quick succession – and had become a private developer itself. That should have raised alarm a decade ago.

 It is learned that even the International Finance Corporation had exited from ILFS for that very reason several years ago. With an aggregate debt pile of 91,000 crores, since downgraded drastically by rating agencies – 60, 000 crores of public sector bank funds are in distress. The public faith displayed by LIC in ILFS conveyed the misleading impression that if LIC can remain invested in ILFS then everything must be kosher there. Over the years ILFS bagged a sizeable number of important projects from the Government of India and the State Governments, including the prestigious Z-Morh and Zojila Pass projects. However, bagging projects is easier than completing them. Its ability to finish the last mile of the projects was deficient and it got embroiled in far too much litigation, insisting on slugging it out relentlessly in court by hiring top lawyers or indulging in expensive arbitrations.

 This was the root cause of the glaring asset-liability mismatch. LIC as a prominent shareholder should have forced ILFS to be objective and to settle its legal and debt issues promptly. But, it chose to paper over its managerial indiscretions. LIC’s Managing Director was on the Board of ILFS. This is the only aspect of its relationship with ILFS that is mentioned in its 2017-18 Annual Report.

 Strangely, its representatives did not highlight any special concerns about the health of ILFS, even as the leverage kept escalating perilously. Once again, with the benefit of hindsight, one must ask today, how will LIC benefit by buying a majority stake in a financial company that has 28% NPAs at an estimated 56,000 crores – a large part being from infrastructure projects? Will LIC be able to display the astuteness and agility needed to resolve the bad debts while forging business ahead?

The rule of the thumb by which all pension funds across the world operate is, “protect the downside at all costs even if it is at the cost of the upside.” LIC doesn’t appear to be taking that wisdom seriously. Pertinent questions that arise are: Why did IRDAI never ask LIC to reduce its shareholding in risky assets like ILFS to below 15%?

 Why did the LIC MD on the Board of ILFS not red-flag the precarious asset-liability mismatch and force ILFS to resolve disputes quickly and force it to relook at the 350 companies that it had spawned?

 Why should the decision of the LIC Board to take control of a faltering IDBI not be termed a case of good money chasing the bad? Unless these questions are satisfactorily answered, it is not clear if LIC will be able to live up to its motto, which is citizen’s welfare as a prime responsibility.


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