|Insuring the budget|
|Tuesday, 06 March 2012 00:00|
LIC saves government, less thought for investors
Apart from insuring the lives of around 20 million Indians, LIC has found a brand new business, that of insuring the budget. When the government of India found that it had no takers for its proposed R12,000 crore sale of ONGC shares, vital for meeting its R40,000 crore disinvestment target, it pressed LIC into action. Figures filed with the stock exchanges on Monday now make it clear LIC bought 37.7 crore of the 43.4 crore ONGC shares on offer. Given the fall in ONGC’s prices since, LIC has lost R750 crore within just 3 days. This, of course, is not the only time LIC has come to the government’s rescue—it bought 70-80% of the public sector NMDC’s R9,930 crore FPO in March 2010, the share price of which has fallen from R300 then to R184, which means LIC has lost well over R2,000 crore on this investment. While having a buyer of last resort for PSU share sales is, no doubt, a matter of great comfort for the finance minister, the same cannot be said for the millions invested in LIC. Given the losses it is sustaining, this obviously means lower returns for investors.
Since investment decisions do go wrong, no one can fault LIC’s top brass for share prices tanking, but what makes LIC’s investment decisions worrying for millions is the manner in which they are made. If most private investors gave ONGC’s share-sale a miss, it was for a good reason—it is impossible to do any sort of analysis of ONGC’s future since almost everything about it is open-ended. First, there is no clarity on what the under-recoveries for the oil sector will be since no one knows if, and when, the government will allow the next price hike for petrol/diesel/gas/kerosene, and how big that will be—under-recoveries in the sector are already R1.4 lakh crore and this will go up as global oil prices rise. While you can still project global crude prices, there is no knowing how much of the under-recoveries will be shared by the government; once you get over that, there is no knowing how much of the balance will have to be met by ONGC and how much by the other oil PSUs. How do you value a company where you don’t know how much money the owner will sequester, and when? And yet, despite all of this, LIC actually went and offered to pay a premium of 5% to the prevailing market price! What’s really galling is that after all the unstinted support (LIC now owns 9.5% of ONGC), the government refuses to rename the oil major ONGC-LIC.