As a captive bank, IDBI will get fresh liquidity from LIC deposits

New Delhi: Last couple of months LIC has been on the receiving end, drawing flak from various quarters for going forward and acquiring an ailing bank.

Analysts and critiques have questioned the deal, calling it as imprudent investment, risking policyholders’ money, questioning IRDA’s favoured treatment and government’s bulldozing of LIC in getting into this deal. Such criticism is scary to say the least, if examined from policyholders’ point of view, who are long term investors and have put their future in the hands of India’s oldest, largest and probably most trusted name.

This essay attempts to analyse the deal with impartial eyes, without wearing coloured glasses through which one can only see negatives associated with public sector. The three main points against the deal are as under- the deal is bail out for beleaguered government bank IDBI at the behest of government which controls both LIC and IDBI Bank, IRDA has bent backwards and favoured LIC, which has been bailing out government divestment initiatives.

Majority of the questions would be answered, if for sake of analysis one goes with the premise that these two entities are owned by a private promoter. In that case merger or takeover would have been initiated by the promoter and boards of respective companies would be asked to do the needful. Ever obliging valuers would be appointed and desired valuation would have been obtained. And all of us would go gaga that process is transparent fair etc.

The crude reality is that no business decision gets ever taken in private sector without first seeking nod from promoter, we would be naïve to believe that promoter like other shareholders come to know of the deal from newspapers.  There is nothing wrong with this as long as end result is in interest of all stakeholders and laws of land are followed.

The same private sector would have gone ahead and would have prepared a scheme of merger and subsequent demerger, renaming etc., and would have made LIC as subsidiary of bank, thus obviating the need for open offer and ownership concession from IRDA, as Banks can hold 100 per cent in insurance subsidiary. Unfortunately, this flexibility is not available to LIC or for that matter to any PSU.

As any change in character of LIC, making it a listed company and giving shares to public, would require amendment to LIC act, getting it passed in Parliament is a tedious process and during this prolong process, the patient in ICU i.e. IDBI Bank would have either revived or died or found other suitor. If revived, LIC would have lost chance of owning a bank, which was always its plan. And if Bank would have failed while waiting, not only it would have caused grave damage to system but loss to all stakeholders and government would be labelled as insensitive and slow.

The third issue is on LIC bailing out government divestment from time to time. While there is truth in it, one has to once again take off coloured classes and examine with prism of reality. First the amount of investible money that LIC has is not a small loose change, that it can deploy without making headlines. Notwithstanding headlines one must examine track record of LIC.

One will not have questions any further if one looks at LIC’s growth, brand image and performance keeping in mind handicaps vis a vis private sector players.

Large size has both advantages as well as disadvantages. In case of LIC, both entry and exit from investment is a difficult process. As it doesn’t hold 100 shares in any company but holds Millions of shares, therefore unlike other investors it cannot time the market. Further it is a long-term player and cannot churn its portfolio without disturbing the price curve either way.

Allegations that LIC Board succumbed to government pressure cannot be done away with conviction at this stage, as none knows facts. However, such allegations certainly questions intent & quality of LIC Board and its investment committee.

Looking at track record of LIC, at least prima facie the criticism appears to be unfair and biased, given its ownership. Exploring an investment lead and taking investment decision can never be equated to succumbing. Unless one has proof, it must be taken as a conscious well taken decision in the interest of organisation.

On face of it the investment makes a business sense as LIC will have a captive bank, can immediately take care of banks liquidity position as it can keep its deposits in IDBI Bank.

Encash IDBI Banks investment in MF and insurance subsidiary, more so it is not a secondary sale but a primary issue which will improve net-worth of bank rather than government encashing it. Valuation was compelling and hopefully board would have done its homework properly, with a blue print for turn around.

While one cannot wish away inefficient operations at most of PSUs, it is important to note that not all inefficiency emanates from weak and poor management and staff, but a major portion is attributed to structure under which PSUs operate.  The jury is not yet out on whether LIC acquiring IDBI banks is a prudent investment or not. Only time will tell the story.