Lending a helping hand to the government in recapitalising public sector banks may have brought Life Insurance Corporation (LIC) of India in the good books of the finance ministry, but the move has irked the Insurance Regulatory and Development Authority (Irda). The insurance regulator is opposed to LIC’s decision to increase its stake in state-run banks to more than the regulatory cap of 10 per cent. It has asked the country’s largest life insurer to give the details of its shareholding in companies.
Irda chairman J Hari Narayan said, “There is a cap for equity exposure. This limit has not been fixed for nothing. There is a question of stability in the system. We have asked for the details from LIC, we will examine these.”
Over the last two months, LIC, the largest domestic institutional investor in the country, has picked up five per cent stakes in a dozen state-run banks and invested more than Rs 7,500 crore, thus helping the government recapitalise these lenders. Accordingly, it has been allotted preferential shares in state-run lenders such as Punjab National Bank, Bank of Baroda, Bank of India, Union Bank and Central Bank of India. After the allotment of shares, LIC’s stakes in all these banks would exceed 10 per cent.
According to the Insurance Act, equity exposure in a single entity is capped at 10 per cent. Thus, LIC can invest up to 10 per cent of the capital employed by the investee company, or 10 per cent of the fund size in a corporate entity, whichever is lower. The capital employed includes share capital, free reserves and debentures or bonds.
“It is not good for banks to have a single large shareholder. This is risky for the system,” Narayan said on the sidelines of a seminar organised by the Insurance Institute of India.
The insurance regulator is worried about LIC’s exposure in banking stocks and other state-run companies, as this may lead to concentration risks. Nearly 26 per cent of LIC’s equity investment is in banks, while nearly 39 per cent of its equity exposure is in stocks of public sector units.
As on March 31, 2011, LIC’s investment corpus stood at about Rs 11 lakh crore, of which 20 per cent, or Rs 2.2 lakh crore, was equity. Of this, investments in state-run stocks stood at Rs 85,031 crore, while exposure in banks stood at around Rs 59,586 crore.
PNB-MetLife deal under lens
The bancassurance deal between Punjab National Bank (PNB) and private life insurer MetLife Insurance has come under Irda’s scanner. Narayan today said the deal was not consistent with the Indian Accounting Standards.
He said, “Under the Indian Accounting Standards, self-generated assets can’t be valued. Brand is a self-generated asset. Hence, this cannot be valued. It will create a bad precedent for the life insurance industry.”
PNB, the country’s second-largest lender, wanted to acquire a stake of 30 per cent in MetLife Insurance for Rs 1. Sources in the insurance industry said the New Delhi-based lender had said the transaction value was determined after taking into account its brand, its 5,000 branches across the country and the future business MetLife would bring in. According to the deal, the lender’s branches would be used to sell MetLife’s insurance products. PNB would earn fees for this. The new company was proposed to be named PNB MetLife India Ltd.
The deal has had an impact on the banking industry, as prospective entrants are flexing their muscles to get the most of insurance companies, owing to the declining growth due to stringent regulation. Manipal-based Syndicate Bank, with over 2,500 branches, plans to better the PNB-MetLife deal and is asking for a premium (about Rs 350 crore) for a minority stake in Birla Sun Life Insurance. Private sector lender IndusInd Bank is also in talks with Aviva Life to pick up a minority stake with a premium.
