Invest in Incredible India

Tuesday, March 23, 2010

Is LIC the New Unit Trust ?

In 2003, the collapse and subsequent bailout of the old Unit Trust of India was the biggest financial crisis that an Indian financial institution had ever faced. Even though many keen observers knew that the Unit Trust was unlikely to actually be in as good health as it pretended to be, the organisation's collapse came as a shock to its ordinary customers.

Seven years later, there are some uncomfortable parallels between the UTI of the time and the Life Insurance Corporation of today. That UTI was a sort of a mutual fund but since its existence predated the rest of the industry and the regulatory framework, there were all sort of exceptions, some theoretical and some just practical, for these exceptions. UTI was a pool of funds outside the government's finances that was nonetheless available to the government for certain purposes. Some of these alternative uses of this money were official and some were private initiatives of decision-makers at different levels.

The deployment of this money was not done transparently and there was no information that was available to the public and the media at large about where it was being invested and what those investments were really worth. Investors identified UTI as an arm of the government and in terms of the marketing pitch for its products, UTI enjoyed an aura of sovereign guarantee. Everyone assumed that UTI was an impregnable fortress of financial solidity without realising how hollow, years of abuse had made it.

If you sit back and think for just a moment, you'll realise that there is reasonable outward evidence that the Unit Trust's history could repeat itself with LIC. It's true that there's a lot that is different about the regulatory framework and the nature of LIC's liabilities. However, the core reasons that led to UTI's collapse also exist for the LIC today: there is an unapologetic tendency to use the LIC as a bottomless pit of money of which there wasn't enough accountability. The blata

nt use of this money to bailout the public sector IPOs is only the most recent and the most visible example-given the lack of public information, it's not possible to make any assumptions that everything else must be OK with LIC's investments-just as it wasn't with the Unit Trust.

When I first wrote about LIC's purchases of huge amounts of shares being sold by the government a few weeks ago, a rather knowledgeable person flippantly said to me, "Why should anyone worry about this? Today LIC is rescuing the government, tomorrow the government will rescue LIC-hisaab baraabar!" I wonder if it will eventually come to that.

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