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Saturday, July 21, 2018

Indefensible deal

In approving the LIC-IDBI stake sale, the LIC board and the insurance regulator have gone against their mandates.

By: Editorial | Updated: July 4, 2018 12:05:13 am
The consequences arising from this proposed acquisition of shares cannot be ignored. The consequences arising from this proposed acquisition of shares cannot be ignored.

Last week, the country’s top insurer, the Life Insurance Corporation of India, obtained the approval of its regulator, the Insurance Regulatory and Development Authority of India (IRDAI) to buy upto 51 per cent in debt-ridden IDBI Bank. The move to nudge LIC to acquire a controlling interest in the bank — the worst performer among state banks with gross NPAs of Rs 55,588.26 crore and a net loss of Rs 8,238 crore at the end of fiscal 2018 — appears to be one of those quick-fix solutions to try and stem the rot in the bank with no takers after it was identified by the government as one of the first cases of privatisation of a lender. The consequences arising from this proposed acquisition of shares cannot be ignored.

In this case, the issue goes wider than that of an insurer owning a bank. The LIC, which already has holdings in over a dozen banks and which has sold over 29 crore policies and has assets under management of over Rs 28.5 lakh crore, has a responsibility to let its policyholders know of the value proposition involved in buying a substantial stake in IDBI Bank. That, and more importantly, protecting its policyholders’ funds is far more central than the interests of the shareholders of IDBI Bank. The LIC Act states that in the discharge of its functions, the Corporation shall act on business principles and take steps necessary or expedient for the protection or realisation of any investment while the IRDAI says that its mission is to protect the interests of policyholders besides promoting the growth of the insurance industry. The insurer’s statute also clearly says that it has a mandate to regulate the investment of funds by insurance firms.

Going by their mandates, the LIC board and the insurance regulator have done the indefensible in this case — emerging as being beholden to the government when they should have examined the proposal far more thoroughly and sought time. The LIC-IDBI Bank stake sale in a way mirrors the controversial buyout by ONGC of GSPC and later HPCL when its majority shareholder, the government, deemed it necessary to push those transactions ignoring the interests of its minority shareholders. What is also disturbing is the growing failure to make a distinction between the funds of policyholders or shareholders and the recourse to it by the sovereign and the value destruction of state-owned companies by the owner itself — the government. The best course would be to call off the proposed deal failing which financial sector regulators — RBI or Sebi — should step in.

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