LIC CAPITAL BASE MAY SWELL TO RS 100 CRHema Ramakrishnan/Mayur Shetty

Hyderabad/Mumbai: The government, which is pushing the legislation to hike the cap in foreign direct investment in insurance from 26% to 49%, is also set to usher in reforms in India’s largest financial institution, Life Insurance Corporation (LIC). It is vetting a proposal to make changes in the LIC Act to enhance the capital base of the corporation from Rs 5 crore to Rs 100 crore. The move will help LIC to comply with the minimum capital prescribed by the Irda Act, which states that no insurer can do business without a paid-up capital of Rs 100 crore. All insurance companies registered by the regulator have paid-up capital above Rs 100 crore. As their business grows, private insurers are required to bring in more capital to meet their solvency requirements. “A hike in the paid-up capital for LIC is aimed at providing a level playing field with private insurers,” said a senior government official. It is not clear whether the new capital will come from the government or from LIC’s own reserves. So far, LIC has been setting aside part of its surplus to build up the prescribed solvency market requirements. However, the moot question is whether a higher paid-up capital would mean that LIC no longer enjoys the government guarantee and some of the relaxations it current enjoys. At present, there is no clarity on this. LIC has not been able to plough back capital as it distributes its entire surplus in the life fund to policyholders and its sole shareholder, the government, in a 95:5 ratio. Its policies are also guaranteed by the government. As LIC does not have funds of its own, it has some relaxations on debt and equity exposures to a single company. It can invest up to 30% of its portfolio in a single company. In fact, LIC dipped into policyholder funds to pick up over 27% in Corporation Bank a few years ago after special permission from the government. Private insurers, on the other hand, can invest only up to 10% of their portfolio in a single company. The government is looking at changes in the investment regulations to remove the differential treatment between public and private sector insurers. Some years ago, consultancy firm Deloitte had suggested that the government guarantee for the liabilities of Life Insurance Corporation was in the form of quasi-capital, and ideally, this should be replaced with real capital. In the absence of a substantial shareholders’ fund, LIC has to turn to the government for funds to expand overseas operations.

Source: The Economic Times