Lic Plans revamps its investment strategy

The state-run insurance giant, also India’s largest institutional investor, plans to change its investment strategy and strengthen its “materiality” policy on related-party transactions, two people familiar with the matter said. LIC, on condition of anonymity. LIC has equity investments worth more than 10,000 billion, while its total assets under management are valued at approximately 41 trillion.

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“LIC is considering whether it can reduce its investments in infrastructure-related businesses, including cement manufacturing, power generation companies and discoms. A new board is in place and any such change in strategy will be subject to committee and board approval,” one of the two said.

An email sent to the LIC spokesperson elicited no response.

The standards of the Insurance Regulatory Development Authority of India (Irdai) require life insurers to spend at least 50% of their investable surplus in government securities, at least 15% in infrastructure-related assets and the remaining 35% remaining to shares, non-convertible debentures, mutual funds and certificates of deposit, among other assets.

LIC also plans to reduce its stakes in its subsidiaries, such as LIC Housing Finance Ltd, LIC Mutual Fund Asset Management Co. Ltd and IDBI Bank, the sources said.

“Irdai has advised LIC to reduce its investments in certain subsidiaries and associated companies. LIC also wants to limit the risks resulting from overexposure to certain individual assets and entities,” the first person said.

LIC’s plan to reduce its exposure to infrastructure-related businesses aims to reduce potential risks associated with non-performing assets.

In a letter dated March 31, 2021, Irdai allowed LIC to own 49% of LIC Housing, but the regulator advised the insurer to “explore the possibility of reducing its stake in LIC Housing Finance” to bring back its exposure within the limits prescribed by Irdai.

Irdai allows insurers to invest up to 20% in a single company, while they can offer up to 5% of their annual fund growth as loans to a single company.

LIC owns 45.24% of LIC Housing Finance Ltd. It directly owns 49% of LIC Mutual Fund and an additional 16% through LIC Housing Finance, which owns 35.3% of the asset management company.

In another important change, in transactions with related parties (subsidiaries, associates and persons related to them) and relations with creditors and borrowers, LIC plans to lower the materiality threshold as a percentage of turnover consolidation and intrinsic value to ensure transparency of these transactions, according to the people cited above.

According to the standards of the Securities and Exchange Board of India (Sebi), any transaction with a related party is material if the value of the transaction exceeds 10% of the consolidated annual turnover of the listed entity.

On February 11, LIC’s Board of Directors adopted a materiality policy to identify large outstanding amounts to creditors. Accordingly, sums due to any creditor of LIC having a monetary value greater than 320.27 crores (for the previous fiscal year) was considered “significant”. This threshold could become even stricter once changes to its policy are implemented.

Under LIC’s current policy, there are only two significant creditors of LIC as of December 31, 2021, to whom LIC owes a total amount of 2,419.42 crores. Sebi standards require the board of directors of a listed company to develop a materiality policy and review it regularly.

Admittedly, Milliman Advisors LLP, which the government engaged to evaluate the intrinsic value of LIC, mentioned in the share sale documents filed with Sebi that the materiality criterion should be set at 8% of the intrinsic value at the level aggregate.

Milliman estimated that the intrinsic value deviated from the requirements by less than 2.5% as of September 30, 2021.

In its prospectus, LIC stated that it currently does not keep information about creditors and the amount owed to each creditor centrally, and that is why the insurer had to apply for an exemption from Sebi’s listing rules to not to disclose the consolidated number of creditors.

This, however, may change, and under the latest plan, LIC may begin disclosing creditor details and amounts owed to each creditor.

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About Meredith Campagna

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