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C. Shivkumar

BANGALORE, July 1

SUCCUMBING to pressure from the Union Government, the Life Insurance Corporation of India (LIC) has done a complete volte face and agreed to participate in the gilts buy-back scheme slated to begin next week.

Sources said here that the LIC has a Government securities portfolio in excess of Rs 1,25,000 crore. Of this more than Rs 30,000 crore fits into the category of high coupon securities, all coupons in excess of 11 per cent. This entire category is expected to be offered for the buy-back programme. The sources said LIC's participation in the buy back was crucial since the bulk of the high coupon securities, coupons above 11 per cent and with maturity beyond 2006, were with the insurer. The buy-back is to be done through the competitive bidding route. The highest discount to market price would be fixed as the buy back price.

The sources said that with LIC's participation, the buy-back amount was also likely to be raised beyond the Rs 82,000 crore indicated through multiple tranches.

The sources said that indications were that the amount was likely to be closer to Rs one lakh crore through multiple tranches. The increase was because, currently the Government's outstanding borrowings through high coupon securities was in excess of Rs 2,50,000 crore. These include securities with 12.30 per cent coupon maturing in 2016 and the 12.60 per cent coupon security maturing in 2018. The outstanding amount on the former is about Rs 13,000 crore and the latter about Rs 12,700 crore. Incidentally, both these securities are treated as illiquid since the floating stock is low. This is particularly because, institutional investors like LIC seldom trade and preferring holding G-secs till maturity.

The sources said LIC had initially declined to participate in the buy back scheme, as unlike the banks' it never had a major non-performing asset problem and therefore there are no large provisioning requirements. But LIC's participation came about as the Minister of State for Finance, Mr Ananda Rao Vithoba Adsul, raised questions about the LIC's solvency ratios. These statements had emanated from the government, the sources said, despite full knowledge of LIC's large reserves, which include hidden reserves and were not factored. The hidden reserves include the Government securities, which are valued at cost and not at market values.

LIC's reservations to participate also stemmed from fears that its investment yields would depreciate.

The yield on incremental investments has already been falling for the life insurer in line with the fall in interest rates. Average yield on investments for the insurer is currently less than 10 per cent. On the flip side however, the sources said that the real yield for the insurer has been widening, since the inflation as measured by the wholesale price index has been falling faster than interest rates.

The sources said that the participation in the buy-back would, however, shrink this spread further.

The only advantage in the buy back was that it would be income neutral.

This was because, the securities offered for buy back would be switched with lower coupon ones, implying that the interest income flow of the insurer would be unaffected.

However, the major fear within LIC is that participation in the buy-back may also provoke some of the State Government to treat this as a precedent and push forward for buybacks.

LIC is the largest investor in State development projects by providing them long-term finance.

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