Life Insurance Corporation of India, the country largest insurer, is in talks with the government to modify its investment norms to diversify the risk.
At present, LIC is allowed to invest up to 10 per cent of 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.
This is due for change. According to sources, LIC is in an advanced stage of discussion with the government on changing the investment norms and the cap for a single company is likely to be one to two per cent of the total investment corpus. The new guideline is expected to be finalised in a couple of months.
According to LIC's annual report for 2009-10, its total investment corpus was Rs 10 lakh crore, which implies the maximum exposure to a particular company could be in the region of Rs 10,000-20,000 crore (Rs 100 200 billion).
Prior to the existing regulations, which came into force in August 2008, LIC was permitted to invest up to 30 per cent of its total fund size in a single company.
"The idea is that exposure risk should be judged on the basis of own investment portfolio and not on the basis of the amount of share we hold in another company. For example, 10 per cent holding in a large-cap company entails a much higher exposure risk than if you hold 10 per cent in a small-cap firm. We are working with the government on these lines," said a senior LIC official, on condition of anonymity.
However, it is not clear whether the new guidelines will be effective for existing investment or only new ones.
Ever since the Insurance Regulatory and Development Authority (Irda) capped LIC's investment in a particular company at 10 per cent, the insurance behemoth has been lobbying with the government to take a second look at the issue.
Though Irda has not asked LIC to pare its existing holding in companies where it was already holding more than 10 per cent, the insurer was asked to follow the 10 per cent cap for new investments.
During 2009-10, LIC invested around Rs 2 lakh crore, of which Rs 60,000 crore (Rs 600 billion) was invested in equities.
During 2010-11, its total investment is estimated to have gone up to Rs 2.5 lakh crore, taking the cumulative investment corpus to Rs 12.5 lakh crore.
