According to news reports, the Life Insurance Corp of India (LIC) will now buy shares in IDBI Bank from the government of India. Logically the price should not exceed one rupee for the entire lot (one rupee so that there is some accounting entry possible). Of course, if wound down, the government would have to pump in a few thousand crores to cover the depositors and lenders to IDBI Bank. In an election year, it may not be a good thing. So, LIC will add one more dud investment.
LIC is a strange animal. It grew up on taxpayer subsidies and is a friend of the politician, who wants to do things that are below the radar. It was started with virtually no capital and the tax exemptions helped it to build an empire. The word “insurance” or “life” has less to do with its business. The empire has been built on the sale of ‘investment’ products rather than pure life insurance products. They have also sold “Fixed Deposits” for five and 10-year periods under some label or the other, calling them ‘single’ premium products. Thus the name is totally misleading.
LIC is also a big shareholder in Indian equities. One wag remarked that it probably holds more shares than are listed on the bourses. In the old days, LIC was the ‘investor’ of last resort. Public issues would have ‘hard’ underwriting by the merchant bankers. And none of the merchant bankers actually had a balance sheet to pick up the devolvement. Most undersubscribed issues were simply ‘sold’ to LIC.
Of course, till the beginning of the ‘90s, we had the DFIs or Development Financial Institutions, like Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India Ltd (IFCI), (Industrial Credit and Investment Corporation of India (ICICI), LIC, General Insurance Corporation of India (GIC) and Unit Trust of India (UTI), which were the pockets into which all unsaleable things were thrust down. ICICI was in those days not as bad as the other government owned DFIs. IFCI had the worst reputation and ICICI the best. LIC was always a dark horse. No one had any idea about their portfolio. It took many, many years before some semblance of disclosures began to be made.
In those days, the DFIs were important to all brokers and merchant bankers: to merchant bankers because the DFIs were the repository for anything that no sane person wanted; to brokers because they could get ‘institutional’ business and all promoter buying and selling had to find parking slots. It was a common sight, just after market hours, to see brokers waiting for a ‘darshan’ of the investment managers at UTI or LIC.
You had to keep seeing them, be friendly with them, your boss had to know their boss and then only business could happen. Every day, in the morning, the institutions would call the brokers and give them orders and prices. I know there were stories, but from my personal experience, I was never asked for anything. Not that I got much business. Maybe my bosses were good at it.
In the ‘90S, I used to interact with the LIC investment team. I could see some desire to change. They apparently used to have some funny rules like ‘cannot sell a share below purchase price’ or ‘cannot invest in companies where there are no fixed assets of adequate magnitude’. You can imagine the portfolio. They missed out early stage investing in technology companies, their holding periods became ‘forever’. The person in charge of investments at that time brought about a lot of changes. Selling rules were changed. I was among the few who were asked to give our views on ‘small’ companies with a direct call to ‘buy’ or ‘sell’. A lot of cleaning up took place.
While this kind of day-to-day businesses went on, LIC was also a pawn in political hands. Whether holding shares beyond their internal limits in companies (ITC was a notable one) or playing games in Larsen & Toubro (L&T) or picking up shares even if their investment department did not like it. So much of debt paper used to be placed with the DFIs that I am sure the list of unpaid and bust debt paper would be miles long. The DFIs were a haven for debt outside the banking system. “Working capital term loan”, “debentures” were but a few of the popular ones. And the DFIs were a lifeline for hundreds of brokers (not the stock exchange types) who would, in a year, place a couple of crores of debt paper of some small company and pocket 2-3% as their fee. Many small companies were not aware of avenues of financing and these intermediaries survived on their information edge plus their perceived ability to ‘fix’ and move papers.
Government ownership of banks and other financial institutions has been an important source of corruption. We are seeing the public sector banks (PSBs) wiping out wealth in figures that almost approach our gross domestic product (GDP). It is therefore very unlikely that the babudom will let go of these ‘kamadhenus’.
The IDBI story is truly a reflection on how flawed our lending system is. IDBI was the big daddy of our DFIs. In those days, the DFIs had a right to convert some part of the loan in to equity of the borrower, at par. This was a rule and no exceptions. As a result, most good promoters were cautious about borrowing from the DFIs, whilst the not so good ones did not care. This was a savior for the DFIs. However, the industry lobby ensured that this clause was scrapped and then the decline was apparent.
Thus started the next round of financial engineering. ICICI became a bank. IFCI did not become anything and IDBI, the big brother had to follow ICICI, which was the big brother in terms of strategy. And the brave UTI was permitted to start a bank! So, here we have a gruel, which has so many ingredients and no taste at all.
While ICICI emerged in a new avatar and UTI Bank (now Axis Bank) is also seemingly doing well despite dubious acquisitions such as Enam Securities and Freecharge, IDBI has truly ‘gone to the dogs’. Over a fourth of the loans are supposedly ‘non- performing’ loans. Salvage value is unknown. At this juncture, the promoter of IDBI Bank has to logically close down the bank. But no, the babus want the misery on the taxpayer to continue so that they can have their cake. So now LIC has been ordered to buy out IDBI Bank. It is contrary to all norms of financial prudence, legal limits and governance. But the promoter has never really bothered about it. What is politically expedient has been more important than what is right.
They have cleverly diverted attention away from this bank, State Bank of India (SBI) and have targeted Bank of Maharashtra for some transgression which is less than Rs100 crore and there is also considerable doubt about the guilt of the persons who have been hauled in. If an honest probe were to be conducted into IDBI, the trail would probably lead to those in the government/s and/or bureaucracy.
Each of these ‘motivated’ investments from LIC policyholders’ money may seem very small in relation to the total size of LIC. However, the sum total of all such dud investments will be enough to break the bank, if made public. It would be wonderful to see a detailed schedule of LIC investments in equity and debt. And of course, we should also remember that the LIC and the PSBs are big holders of state government paper, which can only be redeemed by issuing a new paper. That is another Ponzi scheme that could come to light if the LIC stops growing.
I also recall that when the mutual funds were caught with dud commercial paper in the 2008 crises, there was talk of LIC Mutual Fund passing on the papers to big daddy at cost. Going by the returns on the investment schemes (called insurance policies by LIC agents) it does not look like LIC makes market returns. The insurance regulator, of course, is generally manned by a retired LIC executive, so that LIC is not troubled with uncomfortable questions.
LIC has been totally abused by its politicians and officials. I do not know which will be the proverbial straw that will bring it down. But surely, it is headed there. IDBI Bank will need some excellent accounting to keep fresh capital infusion low. Restructuring the IDBI Bank is worse than starting a new one. Luckily, being a sovereign promoter, there is no fear of a run on the bank. The PSBs and LIC tell us what is wrong with the financial system due to the influence of the politician and the officials.