New India, GIC plan to churn equity kitty

New India Assurance and General Insurance Company (GIC) are learnt to be revamping their investment strategy to actively trade in the equity market.

The move follows the finance minister's announcement of increasing the participation of domestic institutions in the stock market to reduce its dependence on foreign institutional investors.

A senior GIC official said, "We may slightly increase out existing equity portfolio. But the focus will be more on churning of portfolio for higher returns." GIC has a total investment portfolio fo Rs 10,000 crore, of which 25 per cent comprises equities.

A senior official with New India Assurance said, "We are looking at increasing the portfolio and get into more active trading. We are in talks with Irda for permission."

At present, the insurance regulator has fixed norms for investment. An insurance company has to invest 45 per cent its corpus in government guaranteed instrument such as government bonds, SDL, while the remaining 55 per cent is invested in market-related instruments such as public sector bonds, equity market among others.

Currently, Life Insurance Corporation (LIC) is the only domestic institution actively investing in equities. LIC's current equity exposure is around Rs 31,000 crore, of the total portfolio of around Rs 4,00,000 crore and it wants to further increase its exposure by 10 per cent.

A market participant said, strong presence of domestic institutions in equities will only attract more FII inflow into India.

A senior executive with a hedge fund in a recent trip to India had then told Business Standard, "India is an attractive equity destination, which absolute fund managers like us cannot ignore. However, the markets still lack depth and India should encourage more domestic institutions to counter foreign inflows."

The influence of foreign institutional investors is very much evident from the fact that banks, mutual funds and financial institutions (FIs) are no longer the largest shareholders in top rung companies.

FIIs have invested more than $21.5 billion in stocks since January 2002 and, at the end of the March 2005 quarter, were the largest shareholders in more than 270 companies.

In contrast, banks and institutions, which were the largest stakeholders in 75 firms during the March 2002 quarter, now hold lesser equity in these companies.

As on May 10, FIIs accounted for 13.47 per cent of the total market capitalisation of the Bombay Stock Exchange.

A head of equity with a foreign broking firm said, investment by domestic insurers into equities is small compared with equity investment by insurers in a developed market.

Its important to have a robust domestic institutional investors base to counter FIIs. Also, this will allow FIIs to exit when they want to without destabilising the markets.