Long term funds for Indian stocks?

Mon, 23 Jul Pre-Open

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An insurance company cannot take more than 10% equity stake in a company. The insurance watchdog, Insurance Regulatory and Development Authority (IRDA) had made an amendment in investment rule in 2008 which prohibits insurance companies from doing so. However, in a recent development, IRDA seems to be giving a second thought to this amendment. Now it is considering loosening up the cap of 10%. And we strongly believe that it is a welcome move in many senses.

First, this would provide the India capital market the access to much needed long term funds. The Indian equity markets have been at the mercy of foreign funds such as Foreign Institutional Investors (FIIs). The investment by the insurance funds may provide some kind of balancing act whenever the FIIs play truant. The recent large investment made by LIC in Infosys, the Indian Information Technology (IT) giant, is a good example in this regard.

Second, it would give insurance companies more prospects to utilise any attractive opportunity they discover in the market. They would be having more flexibility while making their investment strategies.

Third, the largest insurance group in the country, LIC (Life Insurance Corporation of India) has already breached the 10% ceiling in as much as 78 companies. And it is under the scanner of the industry regulatory body. The Life Insurance Corporation Act of 1956 even allows the insurer to acquire up to 30% equity in companies after government approval. In addition, most of these investments were made before the 2008 amendment of IRDA act. However, LIC was considering to pare down its holdings especially in unlisted companies to bring it in line with the 10% investment ceiling. After the relaxation on the cap, LIC's task would be much easier.

However, the raised investment ceiling must not be used by the government for the fulfillment of its disinvestment target. Recently, concerns were raised by many experts on the manner in which LIC stepped in dramatically at the last minute and rescued the floundering Rs 124 bn auction of shares of Oil and Natural Gas Corporation Limited (ONGC). The reason was that the auction was happening at a premium over the prevailing market price.

Therefore, in our view, IRDA must keep a tab after the relaxation of the rule so that insurance companies exploit the relaxed ceiling for investment in attractive opportunities only.

Definitely, long term funds should be facilitated but not at the cost of policy holder's interests.