The banking regulator is unhappy with the Life Insurance Corporation
(LIC) of India holding more than 10 per cent stake in State Bank of
India, the country’s largest lender. LIC stake in SBI was 11.05 per
cent, as on June 30.
The Reserve Bank of India (RBI) has conveyed its discomfort to the
bank’s management, according to a top SBI official. “These are two big
institutions. RBI is not comfortable with two large institutions having a
cosy relationship,” the official said.
A top RBI official also confirmed the development. “Any
institution that wants to have more than five per cent stake in a bank
needs to have our prior approval, even if the stake is acquired from the
secondary market,” the RBI official said. “We don’t want the banking
sector to have too much capital from volatile sources,” he added.
The move comes at a time when LIC has increased stake in public
sector banks by purchasing shares both from the secondary market and
through direct equity infusion via preferential allotment. The
cash-strapped government had asked LIC to infuse equity into public
sector banks so that these lenders could have eight per cent tier-I
capital. LIC had infused close to Rs 8,000 crore in several public
sector banks such as Punjab National Bank, Bank of Baroda, Union Bank of
India, Dena Bank, and Central Bank of India, among others, in the last
financial year. LIC’s stake in SBI, however, has been acquired from the
secondary market.
Interestingly, the insurance regulator is also unhappy with LIC for
its more than 10 per cent stake in several public sector banks, as such a
move breaches the single company cap norm. Concerned over the
concentration risk, the Insurance Regulatory and Development Authority
(Irda) has sought details of LIC’s investment in banks. Nearly 26 per
cent of LIC’s equity investment is in banks, while nearly 39 per cent of
its equity exposure is in stocks of public sector units.
According to the Insurance Act, equity exposure in a single entity is
capped at 10 per cent. Thus, LIC can invest up to 10 per cent of the
capital employed by the investee company, or 10 per cent of the fund
size in a corporate entity, whichever is lower. The capital employed
includes share capital, free reserves and debentures or bonds.
As on March 31, 2011, LIC’s investment corpus stood at nearly Rs 11
lakh crore, of which 20 per cent, or Rs 2.2 lakh crore, was equity. Of
that, investments in state-run stocks stood at Rs 85,031 crore, while
exposure in banks stood at nearly Rs 59,586 crore.