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 five to seven 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 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 K R 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.
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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.