Getting PSUs to buy PSU shares is hardly disinvestment
With LIC losing over R5,000 crore in mark-to-market terms in just three of its big-ticket purchases of PSUs since February 2010—R986 crore in NTPC, R2,659 crore in NMDC and R1,525 crore in ONGC—the government needs to relook its strategy of getting LIC to step in to pick up PSU shares when all else fails. LIC has bought around 40-45% of this year’s disinvestment so far, and we haven’t even traversed a 40th of the distance so far—Hindustan Copper’s divestment was for just R800 crore as compared to the R30,000 crore target—so there’s a lot more of PSU divestment that LIC may be called in to rescue. To be sure, LIC may still look like it is making profits but that’s due to its older holdings. In the case of ONGC, for instance, in September last year, LIC’s average holdings of 3.17% of ONGC’s shares were worth around R268 a share. In September 2012, its average holdings of 7.77% of ONGC weren’t much higher at R284 a share, but this hides the fact that it bought around 40 crore shares at R304 apiece in March 2012. But even after taking this into account, between September 28, 2012, and yesterday, LIC has lost R1,300 crore. LIC has even been buying quite aggressively into PSU banks which have been losing value quite rapidly given the speed at which they are accumulating NPAs. In some banks, with the government unable to shore up their capital needs, fresh equity was subscribed to by LIC. The insurer, for instance, nearly trebled its holding in Punjab National Bank (PNB) to 14.15% over the year to September 2012 during which time the bank’s stock price fell 12%.
Since the BSE Bankex put on 21% during this period, clearly there were several other bank stocks that fared well; many of them in the private sector. Had LIC simply modelled its portfolio of bank stocks on the lines of the index, investors would have seen far better returns. It’s true that for LIC policy holders, it’s not important whether LIC buys PSU stocks or whether it buys private sector stocks. But if in the last three years the 20-stock CNX PSE index has underperformed the broader Nifty by a wide margin, it is a matter of concern. In the last eight years, the Nifty has outperformed the CNX PSE five times. Perhaps why LIC’s policyholders have been getting just a 6% or so return each year. What makes things worse is that, if LIC is saddled with large chunks of PSU stock, it means getting an exit will become more difficult, especially in the less liquid counters. An insurance company like LIC needs to have a robust balance sheet dealing as it does with the savings of millions of small households. Rating agency Moody’s has already downgraded the institution earlier this year because it felt the insurer was over-exposed to domestic sovereign debt. Now there’s the danger of over-exposure to government equity.