With more than a quarter of a billion customers, the Life Insurance Corporation (LIC) of India has once again dug into its pockets to prop up its financially-strapped owner.
Policyholders in LIC, a behemoth that's little known outside the country, could be forgiven for watching with a helpless sense of déjà vu.
LIC has bailed out the government before. It bought shares in state-owned banks in 2009. In 2010, it bought the government's stake in a mining firm. This time, it is injecting a billion dollars into some state banks. It has also bought out part of the government's stake in an oil firm.
Taxpayers should have been outraged at LIC's decision earlier this month to buy $2.5 billion of overpriced shares in the Oil and Natural Gas Corporation (ONGC). Analysts believe the government sold them at a 5 to 7 per cent premium to the market price of Rs 283. The shares were trading at about Rs 282 on Tuesday.
Holders of LIC's 300 million insurance contracts possibly know that the insurance firm might have lost 25 per cent of the value of its investments so far in government-owned businesses.
The situation is also eerily familiar for millions of investors in India's first mutual fund, the US-64. The fund collapsed after the state-sponsored manager, the Unit Trust of India (UTI), took heavy losses on its investments, including those in other state-owned units in the 1990s.
And yet, reactions are muted in a country where the government's fiddling with the accounts of businesses it owns is par for the course.
"If the government wants to use the state-owned companies to fund its capital raising programmes, then these companies can financially turn weak at some point of time," said Deven Choksey, chief executive of Mumbai-based brokerage KR Choksey.
"This can be a dangerous proposition for the country as a whole."
No Sleepless Nights
Beyond raising eyebrows, though, the risk that the firm entrusted with providing basic insurance for millions of Indians could suffer massive losses is giving no one sleepless nights.
On the contrary, observers find such risks are a small price to pay for the safety afforded by India's unique model of state capitalism. The government owns a majority stake in the country's biggest banks, oil firms and the biggest players in the resources sector.
The government's long reluctance to reduce its stranglehold on the financial sector has meant two things: government debt is massive, equivalent to more than 70 per cent of the economy, and the interbred government sector is trapped in a complex and opaque web of unhealthy cross-holdings.
The system has its fans, particularly after the 2008 Lehman collapse and then the European debt crisis, which felled institutions across the developed world. India's banks stood strong through both crises.
The government has also played godfather when necessary. It stepped in when UTI floundered in 2002, facilitating a deal that ensured investors could trade their worthless units in the fund for bonds. It is in the process of bailing out a state airline.
State-owned loss-making airline Air India, which employs 28,000, is getting $4 billion worth of debt restructured by government-owned banks. Ailing private airline Kingfisher isn't going to be that fortunate.
When the world is in a crisis, "it is difficult to argue that this particular form of financial repression or regulation which the government has adopted as its way of keeping the Indian financial system safe doesn't work," said Jahangir Aziz, chief Asia economist at JPMorgan.
Next Generations's Problem?
In LIC's case though, the question of the soundness of these investments is somewhat irrelevant, simply because the company won't run out of funds for many, many years.
With assets of $300 billion, one-fifth of India's economic output, LIC will continue to rake in more in insurance premiums from a young and untapped population than it pays out in claims for several more decades.
The government, meanwhile, is struggling to contain its fiscal deficit as it foots a massive bill for a populist agenda that includes fuel subsidies, food handouts and guaranteed rural wages.
The budget for the year ending March 31 provided just Rs 600 billion to recapitalise banks. The largest bank, the State Bank of India, alone needs Rs 80 billion to meet a minimum tier-1 capital adequacy requirement of 8 per cent by month's end.
For all the arm-twisting by the government, LIC's investment income has grown exponentially, from about Rs 322 billion in the fiscal year that ended March 2006 to Rs 777 billion five years later.
Some of the investments the insurance firm was asked to make in banks have swollen handsomely. The 24.4 million shares LIC bought in the State Bank of India in the first quarter of 2009 have risen by about 60 per cent to date, even if one assumes they were bought at the peak price of Rs 1,376 in March 2009.
Likewise, it bought 3.23 million shares of Bank of India to increase its stake in early 2009. There's been a gain of more than 40 per cent on that investment.
So, in some respects, LIC is different from the UTI case which then nearly claimed a prime minister and a finance minister.
Yet, there are legitimate issues around the propriety of a system that allows its government to put its hand in the public-sector cookie jar this frequently.
"When you ask LIC to put in money into ONGC at a price which is ridiculous, it is certainly putting money into bad use," said Arun Kejriwal, a strategist at research firm KRIS. "Taxpayers should have a right to challenge that."
The sovereign regularly ignores its corporate governance rules on how the promoter of a firm can use its spare cash, and its actions often run counter to both public interest and the profit motives of its companies.
A recent example is Coal India. Minority shareholders in the state-owned miner had little say when the government earlier this year asked it to increase its supply of the scarce commodity. Coal India was also ordered to reverse a rise in coal prices.
The government pays no heed to the insurance regulator, which is worried about LIC holding more than a stipulated 10 per cent stake in the banks.
LIC's bias towards equity, owing to the state-directed investments, are also painfully reminiscent of UTI's mistakes in the 1990s. By some estimates, LIC has contributed more than one-quarter of the $9 billion the government has raised by selling stakes in state enterprises.
It is also estimated that about one-quarter of LIC's equity investment is in banks, while nearly 39 per cent is in public sector units, raising concerns of concentration risks.
The recent ONGC purchase "is daylight robbery," Yashwant Sinha, leader of the BJP, was quoted as saying last week. "LIC is a captive source of funds for the government. They have misused the status of LIC to misappropriate policyholders' money and brought it to the government's coffers through the ONGC disinvestment."
But that criticism comes from a former finance minister who in 1999 oversaw an arrangement of cross-holdings among large and profitable state-owned petroleum companies, the Indian Oil Corp and ONGC, once again a piece of financial juggling to make government accounts look good.
Sometimes people make allowances for a government, letting it get away with unjustifiable practices if they are for the country's greater good, said JPMorgan's Aziz.
"But at some point in time, LIC will be forced to think in terms of its own shareholders.
"And there will be serious questions asked about whether the middle class in India should be subjected to these kinds of shocks LIC's assets are putting them through," he said.