2012 - The LIC ONGC story so far

For this fiscal ending March 2012 the Government of India had a firm target of acquiring Rs 40,000 crores through its disinvestment strategies. Part of its strategy to achieve the target was the 5% stake offer of Oil and Natural Gas Commission (ONGC). However a flurry of over expectation, bad marketing and perilous economic scenario threatened to completely pulverize this move. Once again, as we have seen in the past, Life Insurance Corporation of India (LIC) came to its rescue.

How LIC saved the day –

The average quoted price per share was Rs 303.67, which is actually about 5% higher than its floor price of Rs 290. The auction got lukewarm response from foreign financial institutions and domestic banks. The over estimation almost lead to an embarrassing flop. But when things started to look bad, LIC opted to buy about 4.6% stake (of the available 5% stake) or about 40 crore shares thus pushing its investment to about Rs Rs 12,146.80. Till the October – December quarter of this fiscal, LIC already had 3.23% stake in ONGC. With this new investment their total stake has risen to about 8%. This is of course less than the 10% cap imposed by Insurance Regulatory Authority of India (IRDA) on any insurance companies.

What was the cost of this investment to LIC?

The value of share came down to Rs 280 in just two days. That means in just two days, LIC made a loss of about Rs 912 crores. The recent Union Budget added to its woes. Finance Minister Mr Pranab Mukherjee hiked the cess on crude and petroleum oil to Rs 4500 per tone from Rs 2500 per tone. This move would eventually bring down ONGC profit before tax by Rs 5500 crore. Obviously a decrease in stock price was on its way. As I write this article, ONGC’s stock price was hovering over Rs 272 – 273. If you do the math it is not difficult to understand that the loss is around Rs. 1200 crores. The budgetary move has also encouraged Bank of America Merril Lynch to downgrade ONGC shares to “neutral” from its earlier recommendation of “buy”.

What’s ahead?

Government of India’s strategy of transferring money from one pocket (LIC) to the other pocket (Government of India) worked out in the above case. It remains to be seen what interesting episodes awaits this eco-political drama when it sets out to achieve its remaining target.

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IRDA withdraws the controversial 4.5% guaranteed return on pension products

Life Insurance Companies in India can rejoice at the IRDA’s withdrawal from the controversial 4.5 per cent guaranteed return on pension plans. Usually these returns are fixed according to the reverse repo rate. Reverse Repo rate is the rate at which banks deposits their excess funds in the Reverse Bank of India (in simple words it is the rate at which RBI borrows from the banks). The mandatory return on these pension products was supposed to be 50 basis points more than the reverse repo rate. A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. For example, if the RBI raises interest rates by 50 basis points, it means that rates have risen by 0.50% percentage points. If rates were at 2.50%, and the RBI raised them by 0.50%, or 50 basis points, the new interest rate would be 3.00%.

However amidst this decision the Indian life insurance frontrunner Life Insurance Corporation, India (LIC) has set to offer upto 6% return on it’s unit linked pension product, Pension Plus. Even during the time when the mandatory 4.5 % return was in effect, LIC was the only company to have offered such pension plans. The private players refrained from taking such a risk. The unpopularity of this guideline has forced IRDA to revise it. This revised guideline talks about non zero or capital return instead of a fixed return. Although seeing LIC’s magnanimous premium collected (Rs 400 crore) since the last year through Pension Plus stands testimony to the fact that the guaranteed return guideline should actually work, we should not overlook the fact that other life insurance companies are far behind LIC in terms of size and penetration.

Now we shall all have to wait and see what the private insurers have to offer for pension products.

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