In 2009-10, net investment by foreign institutional investors in Indian equity markets was Rs 1,10,744 crore. The only entity which came close was LIC, which made an equity investment of Rs 61,463 crore. Significantly, while FIIs have covered their exposure to stocks by taking up positions in derivatives, LIC’s entire investment is unhedged. The Insurance Regulatory and Development Authority rules do not permit investments in derivatives by insurance companies. Still, LIC has managed to act as a major domestic countervailing force to the FIIs.
As a result, while LIC has clearly emerged as the counter-weight to FIIs in the Indian equity market, the insurance major has few if any defence against market volatility. Company officials are understandably cagey about taking a public position on the issue. Mohan Raj, executive director (investments) said the company expects to make sizable investment in the current financial year too as the sentiment in the market has improved and several public offers are in the pipeline. He also said higher investments are essentially linked to premium collections. “If premium from equity-linked Ulips goes up, the investment in the equity market rises.”
Yet, the investments made by India’s largest life insurer has been a bulwark for the relative stability of the Indian equity markets in a year of massive global turmoil.
To get a measure of this statistic, one needs to compare the FII behaviour with that of LIC in 2008-09. In the year when LIC made a net investment of Rs 40,800 crore, FIIs withdrew Rs 48,248 crore from the Indian equity market. The trend of deeper LIC presence in the equity market is persisting in the current financial year too. In just April and May, the company has invested Rs 8,363 crore in equities compared with just Rs 1,189 core made by the FIIs.
Sanjay Sinha, CEO, L&T Mutual Fund said: “Not just LIC, the entire class of domestic financial institutions can be a counter to the volatility brought about by large exits sometimes made by the FIIs.”
Sinha also makes the point that the objective of institutions like LIC should not be to offer an exit avenue for FIIs (to shore up prices in the domestic market) – it must take advantage of opportunities to sell too.
Commented SBMathur, former chairman of LIC and incumbent secretary-general of the Life Insurance Council: “The insurance industry is not allowed to participate in the derivatives market. But if they are allowed in derivatives within prudent limits, they can reduce the influence of FIIs to almost half.”
He emphasised that LIC has become a sufficient counter-weight to FIIs as far as the cash market is concerned and drew parallels with the South Korean equity market. “FIIs were net sellers in the Korean market for three consecutive years from 2005. But the Korean market actually went up in all these three years because their domestic institutions had matured enough.”
Because of these restrictions, the bulk of LIC investments are held for very long periods that, in turn, cut down liquidity in the markets and the insurance company’s ability to offer higher returns to investors. As a senior executive in a rating agency said: “LIC’s impact on markets is limited in comparison to that of FIIs, simply because LIC is a long-term player. Both its investments and withdrawals are phased; in contrast, FIIs invest and withdraw in large numbers at once, thereby having a relatively stronger impact.”
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