State-owned insurer keen to get large chunks of blue-chips

Life Insurance Corporation LIC has set aside a corpus of nearly Rs 10,000 crore to buy a part of shares owned by the Special Undertaking of Unit Trust of India SUUTI The government has informally sounded out LIC about the impending dilution of SUUTI and the country’s largest investor is all set to pounce on the opportunity, according to people familiar with the development

According to data provided by Business Standard Research Bureau, SUUTI held more than one per cent stake in 19 firms as of September 30 At Thursday’s close, this holding was worth Rs 33,000 crore The bulk of this value came from the undertaking’s holding in three blue chips: 1154 per cent in ITC Ltd, 827 per cent in Larsen & Toubro and 2358 per cent in Axis Bank

“We will be interested, as these are very good investment options Funds won’t be a problem as we will be investing more than Rs 15,000 crore in equities in the last quarter,” said a senior LIC official

For the insurer, it makes sense to buy the huge chunk of blue-chips at minimum impact cost If it tries to accumulate such quantities of shares in the open market, the share prices will spike, making the acquisitions expensive

Analysts see this as a preferred solution for the managements, too Of these three companies, Larsen & Toubro and ITC do not have any identifiable promoters So, a dilution by SUUTI could potentially put the managements of these companies at risk in case these shares are picked by a hostile strategic investor However, if LIC, a financial investor, steps in, the status quo will not be disturbed

According to insurance sector rules, an insurance company can invest in up to 10 per cent stake in an investee company However, LIC has been granted a special exemption in certain cases, including the above three companies “We have to take permission from the regulator to increase our holdings to more than 10 per cent But, that won’t be a problem as earlier too the regulator allowed it under special circumstances,” the official said

LIC is already the single largest shareholder in L&T with 1915 per cent and the second largest shareholder in ITC with 125 per cent In Axis Bank, it owns 98 per cent With the recent changes in takeover rules, the life insurance behemoth can acquire up to 2499 per cent in these companies, without triggering open offer obligations According to a BS Research Bureau analysis, LIC has the headroom to buy 585 per cent more in L&T and 1248 per cent more in ITC In Axis Bank, since it is part of the promoter group investors, along with SUUTI and state-owned general insurance firms, it can technically buy the entire 2357 per cent owned by SUUTI through an inter-se transfer

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However, LIC might settle for a smaller increase in each of the companies, deploying funds up to Rs 10,000 crore in the process, officials said

The government had planned to raise Rs 40,000 crore through the disinvestment programme However, due to tough market conditions it could not sell shares even in large-cap firms such as ONGC and SAIL As an additional route to boost divestment proceeds, Mumbai-based brokerage ICICI Securities had suggested dilution of the government’s stake in these three blue-chips, which are professionally managed, have strong balance sheets and are better valued by the market This move is being considered as part of the revised divestment plan by the Union Cabinet

In the current financial year so far, LIC has invested Rs 25,000 crore in equities, way short of its target of Rs 40,000 crore for the year LIC’s total investment corpus stood around Rs 11 lakh crore as on March 31, 2011, of which 20 per cent, or Rs 22 lakh crore, was in equity During 2010-11, LIC invested Rs 196 lakh crore, of which Rs 43,000 crore was invested in equities In the current financial year, the insurer has plans to invest a similar amount in equities