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Essay on the Life Insurance Corporation in India (LIC)!

The LIC was established in 1956 by nationalising all the life insurance companies operating in India. Since then in the field of life insurance the LIC has near-monopoly, as the amount of life insurance business through postal insurance and state insurance is relatively much smaller. Life insurance is a very important form of long-term contractual savings. It both promotes savings and results in their institutionalisation or mobilisation.

The income-tax concession provides further incentive to higher-income persons to save through life insurance policies. The total volume of insurance business has also been growing in the country with the spread of insurance consciousness in the country.

It can grow at a faster speed, if the organizational and operational efficiency of the LIC can be improved (and there is a lot of scope for it), new kinds of insurance covers introduced, its services extended to smaller places, the message of life insurance made more popular, and the general price level is kept stable, so that the insuring public does not get cheated of a large chunk of the real value of its long-term savings through inflation.

The importance of the LIC as a capital-market or term-financing institution is very high. The annual net accrual o investible funds from life business (after meeting all kinds of payments liabilities to policyholders) and net income from its vast investment are quite large. Equally, its size of the investment portfolio outstanding is also very large. At the end of March 1995 this was about Rs. 53,500 crore.

The LIC is a heavy investor of funds in government’s dated market securities. In 1994-95, it had invested more than Rs. 44,000 crore in them. Besides it had sanctioned and disbursed financial assistance to the corporate sector amounting to Rs. 1,790 crore and 1,340 crore, respectively. Like banks, the LIC also is a captive investor in government bonds. Under the law, the Lie is required to invest at least 50% of its accruals in the form of premium income in government and other approved securities, sub­ject to a minimum of 25% in central government securities.

Besides, it has to invest in debentures of co-operative land development banks, and give loans to approved authorities (like state governments and electricity boards) for such social schemes as housing, water supply, electricity, etc. These investments and loans should add up to at least 87.5% of the premium income. Only the remaining 12.5 per cent can be made available directly to the private sector.

The loans for housing and investments in the share capital and bonds of other financial institutions, especially land development banks go, in the main, to the private sector. Therefore, the contribu­tion of life funds to the private sector is much more than what is indi­cated by the figures of its direct assistance to the sector.

The LIC funds are made available directly to the private sector through investment in shares and debentures and loans. The largest amount is invested in equity shares, followed by preference shares and then debentures. The LIC has played a leading role (along with the ICICI) in developing the underwriting (of new issues) business.

Now other financial institutions led by the IDBI have also become very important. Underwriting of new issues by the LIC is usually done with the objective of purchasing the issue for its own portfolio and not for le to the public.

The bulk of the LIC’s purchases of industrial securities are, however, made in the second-hand market, and not the new issues market for the simple reason that there are not enough new issues forthcoming in the market to meet the demand for issues from the financial institutions and the investing public.

The LIC is a very powerful factor in the securities market in large and medium-sized non-financial companies and is significant in size. In a great many individual companies its equity shareholding is sizeable, going up to 30 per cent. Thus, the ownership interests of the Lie alone in industrial equity show the hold the public sector financial institutions have come to acquire in the private corporate sector. Add to this the share-holding of other public financial institutions and their convertibility rights.

The total would make the public financial institutions the single largest group of owners of a large number of private-sector companies. However, these ownership rights (actual and potential) have been exercised to a very limited extent so far. As would be expected, the LIC’s investments in large companies are large. This is because the shares of such companies are normally more profitable to hold commercially and are relatively easier to acquire, too. The floating market supply of shares of good small companies is generally small.

The LIC acts as a kind of downward stabiliser for the share mar­ket, as the continuous inflow” of fresh funds with it enables it to buy even when the market is weak. Since it is a long-term investor rather than a speculator, it is happy to buy good scrips when their prices are low and therefore benefit from their price appreciation when the mar­ket improves. But, for the same reason, it does not usually sell shares from its holdings even when the market has overshot. This is partly due to the continuous pressure for investing new funds and partly due to the disincentive of the capital gains tax.

The result is that on the upward movement the stock market is not mellowed by the presence or the investment policy of the LIC. In this context it should also be noted that this kind of investment policy of the LIC (as also of the UTI and the GIC and its subsidiaries) does not facilitate or promote wider participation by the public in equity investment by acting as ‘seasoning’ houses for shares, releasing them for the general public when it is willing to hold them and buying back a part of them on the market downturn at lower prices.

These way price fluctuations on the stock market will be smaller, the public confidence and participation in the stock market will improve, and the public financial institutions will gain, if they do not count out the tax they pay the government on the capital gains they make in the process.

Related Articles:

• General Insurance Companies in India
• Life Insurance Corporation of India (LIC): Management, Objectives and Activities

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