LIC Direct’s emails hard sells its annuity product creating a fear that interest rates in India may drop to 2% to 4% in next 20 years! If LIC is confident about it, then why does its annuity product lock in the rate of 7% to 8% for the lifetime of a customer?
LIC Direct, an alternate distribution route from Life Insurance Corporation of India (LIC), is sending promotional emails with a pitch about India joining the club of developed countries in a few years. As a developed country, interest rates in India after 20 years can be 2% to 4%, it claims. The offer is to buy Jeevan Akshay VI, which has current annuity rates of 7% to 8%. If the interest rates were really going to fall to such lows, LIC should not be taking the risk of locking the customer at high annuity rates of 7% to 8%. Has Insurance Regulatory and Development Authority (IRDA) approved the LIC advertisement?
LIC’s sales pitch is mis-selling through false advertisement by fear-mongering about interest rates. The email talks about prevalent interest rates in some developed countries to be 2% to 4%. While it may be true at this time, it does not have to be always true. In the U.S, Fixed Deposits (FD) interest rate for 10 out of last 20 years has given 5% to little over 7% p.a. returns. So, LIC is really making false and misleading statements. That apart, future interest rates in India will depend on lot of factors including inflationary expectations, taxes, risks of investment, consumption, liquidity and so on. Asserting that India is expected to join the club of developed countries in a few years is preposterous.
Annuity products give customer fixed returns every year for a lifetime. E.g. A person of age 50 years making a one-time payment of Rs1 lakh to buy Jeevan Akshay VI product will get 7% p.a., which is Rs7,000 per year for lifetime. The insurance company takes the risk of interest rate movements and longevity of the annuitant. Increase in the longevity of Indians and market interest rate’s downward movement means higher risk for an insurance company. If the market interest rates were to drop to 2% to 4%, the annuitant getting 7% to 8% will continue to do so till his lifetime. In that case, LIC should not be taking the risk of offering 7% to 8% annuity as it will make huge losses when market interest rate is only 2% to 4%.
Jeevan Akshay VI, an annuity product, offers 6.89% to 7.48% lifetime lock-in rate for a customer of age 30 to 80 years respectively. Online purchase of the product gives a rebate of 1% by way of increase in the annuity rate. Annuity is taxable in India. The specified rates are for option of purchase price is returned to the beneficiary after the death of the annuitant.
A reversal would only be seen if the Nifty closes above any previous day’s high
Companies are beginning to skimp on disclosures to their investors, showing that transparency is on the decline and a concern for investors
Kotak Institutional Equities (Kotak) has pointed out that disclosure standards of Indian companies are going down and has provided two examples from the September quarter results: Axis Bank and Shree Cements. Regarding Axis Bank, Kotak stated, “Axis Bank did not provide details of fee income as it did historically. We note that Axis provides the maximum disclosures on fee income though it is not obliged to share such details as per listing requirements.” While, it is not mandatory to disclose fee breakup, they have skipped on such a practice for the first time. Even though fee income did rise, which surprised investors, the more surprising fact was the departure from maximum disclosure practice, which lends some credence on good corporate governance. Whether they will disclose fee breakup next quarter remains to be seen. A table of the details of retail banking split up is not provided as shown in table below:
Similarly, Kotak noticed that Shree Cements too skimped on providing disclosures that would be beneficial to the investors. It said, “Shree Cements did not provide details of cement sales volumes, which it used to provide historically (until the fourth quarter of the 2012 fiscal year). The company is not obliged to share this information but sales volume is basic data for investors and analysts to appreciate a company’s financials better.”
While these are not major infractions (as no law was broken), the bridge between the corporate and retail investor—trust—is now on the wane as companies choose to skimp on voluntary disclosures.
Disclosure is one of the main ingredients for a healthy capital market system and is of paramount importance if retail investors are expected to invest in large numbers. As transparency increases, so does trust. Unfortunately, this isn’t happening and Moneylife has pointed out this several times in the past. The retail investor base has dwindled to such a large extent (check our position paper on retail investment) that SEBI has resorted to half-hearted measures to woo back retail investors, especially through the so called disclosure-based regime, which has yielded little benefits because there’s no protection for the retail investor.
We had written a cover story on transparency in IPOs a long time back, in 2008. Furthermore, the lack of transparency in pricing in IPOs, especially public sector IPOs, in India has left investors cold and turns out to be a loser’s game. More pertinently, one of the biggest companies, Reliance Industries, had failed to disclose about material information about the steep decline in the output in its KG-D6 block, which has hurt investors. Our columnist R Balakrishnan had written an article about accounting standards and disclosures, here, which has been on the decline as well.
Poor quality disclosures are not confined to just the equity market. There are questions over the Insurance Regulation Development Authority’s (IRDA) soon to be announced guidelines on insurance company IPOs. Ashvin Parekh of Ernst & Young, had said, “Disclosures for profitability of different product lines should have been made long ago. It would have helped not just for IPOs, but also for corporate governance. But the regulators have already missed the boat by seven to eight years.” You can read more here.
All investors should be worried about the level of corporate governance. This makes it a lot harder for investors to make informed decision based on qualitative information.