LIC tidying up its equity portfolio ahead of IPO; insurer trimmed stake in firms with low market cap

The British-owned, among the oldest and biggest life insurers in the world, had initially proposed to invest up to $4.5 billion to bring its holding to as much as 45% from 38% in the Indian company.

With its investments in stocks like Indiabulls Housing Finance Ltd and Chennai-based Corporate Express Ltd falling, state-owned Life Insurance Corporation (LIC) has cut its stake in these companies in the past few weeks, with a planned divestment in Jindal Steel on the cards, according to market sources. LIC, with assets worth over Rs 30 trillion, was India’s largest single shareholder for a long time. Yet the stock it had invested in and which it holds remains far below the index.

As of early this year, the insurer held stakes in 19 listed companies. But since then, it has reduced its holdings in 16 of these — some of them by over 50%.

This trend comes in the run-up to the June 11 IPO of the company and the subsequent bid for the government’s stake. One reason for the divestment is that the value of their existing investments is falling. LIC plans to sell up to 10.2% of its stake in the state-owned company. But its stake in the bank, aviation company and cement company is far below where it is now and would increase the size of the government’s stake in each company, which already constitutes about 20% of its market value.

While its stocks in several companies like Indiabulls and Corporate Express have sunk, the stock of Jindal Steel, which is due to be listed this month, has soared. And though the state-owned insurer plans to sell only a bit of its stake in this company, the sales are about to start, much to the chagrin of the government, which plans to make a tidy profit on its stake sale.

LIC’s position in most of the companies under its investment basket is so far limited to its current shareholding. Analysts point out that its stakes, for instance, in State Bank of India and Infosys are controlled by the government and the lender by the Reserve Bank of India. But LIC’s investment in Hindustan Unilever would be represented by its stake in the Indian unit of Unilever. So it would make a profit from even if the government sells its stake below the level of its current holding.

The British-owned, among the oldest and biggest life insurers in the world, had initially proposed to invest up to $4.5 billion to bring its holding to as much as 45% from 38% in the Indian company. Having already turned its money around by divesting in the various companies, it now wants to spread out its portfolio through an IPO and monetise its investment holdings more generally. The most recent share sale of PSU banks to private investors, so many as it did in a single day in March this year, is one such initiative. A second big one, in banking giant ICICI, would be just ahead.

This would help the government infuse new capital into the banks. As of early this year, LIC had equity worth Rs 2.5 trillion, and all this of course comes largely from its insurance holdings. A similar amount would not even meet the government’s Rs 2.5 trillion stock market investment target for this fiscal year. Why wouldn’t it be seeking to bring in capital itself?

Inevitably, a big part of LIC’s big current share buy-back programme is tied up with the government: To return government money to taxpayers in what is the first government sell-off of its holdings in this institution. And there are a lot of government divestments to come. Almost a quarter of the budgeted deposit receipts, worth over Rs 2 trillion, are earmarked for state-owned firms.

As LIC has made clear, the government-controlled life insurer is also an investor in government-controlled private companies, a lot of which are engaged in providing government services. It is that interest that can get into choppy waters. LIC’s public position, after all, is even lower than its stake in the public sector in other countries, says one analyst, “And this is after it has its own interests at heart”.

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