India's financial regulators may relax restrictions on local institutions' investing assets offshore within the next 12 months, says RN Bhardwaj, managing director at Life Insurance Corporation of India (LIC), which manages 340,000 crore (Rs3.4 trillion, $75 billion).
Because of LIC's huge size, it has asked government officials to allow it to invest some of its assets overseas. Bhardwaj is confident the government will agree, noting that the Reserve Bank of India (the central bank) has recently allowed banks to place some call money in an offshore facility and for individuals to invest up to $25,000 abroad each year. The LIC has also made its request to the finance minister, P. Chidambaram. The first step is to gain the approval of the Insurance Regulatory and Development Authority (Irda).
It is possible, however, that Irda will decide it can only give such approval if it receives Parliament's approval to change the legislation that established the regulator. If that is the case, the change may never occur, as politicians will take issue with the notion of the 'people's money' being sent abroad instead of being invested in domestic projects.
If, however, the LIC can invest abroad, it will need to outsource to external fund managers. A number of banks, such as Deutsche Bank and HSBC, and local giant ICICI Bank, have been talking to LIC about this. LIC has also retained Deloitte Touche Tohmatsu since last year to help it upgrade its investment operations.
The state-owned LIC became so big because until deregulation in 1999 it enjoyed a monopoly on the life insurance industry. It boasts over 2,000 branch offices and over one million tied sales agents. It subscribes to 20% of all government-issued bonds, and is the country's largest real estate holder, after Indian Railways. It is a key investor in government infrastructure and housing projects.
Its investment guidelines are tightly controlled. LIC must invest at least 50% of assets into central government bonds, 15% into infrastructure and the social sector, and a maximum of 35% into the corporate sector, which includes bonds, stocks and project finance. Of its corporate sector portfolio, no more than 10% can be in equities.
In 2003, the LIC's total return was 9.57%, including profits on securities trading. The LIC gave 95% of its capital gains to shareholders and returned the rest to the government.
"We're quite comfortable," says Bhardwaj, noting that strong equities performance has compensated for the fall in interest rates. And the organization has "hidden reserves" such as its real estate portfolio, which is much more valuable than book.
"We're the only Indian institution that invests for the long term, for 15-20 years, and that can provide funds in a large quantity to developing infrastructure," he adds. "Our size enables us to bargain for better yields than the rest of the market can get."
Despite LIC's size, Bhardwaj says liquidity is not a problem, because the organization tends to hold its bonds to maturity and only trades the most liquid securities.
The LIC manages its entire portfolio in house. Irda has recently allowed insurance companies to invest small amounts in third-party fund companies' cash and bond funds. The LIC has doled out small bits.
"But they don't do any better than us," Bhardwaj says. If the insurer decided it needed to outsource a lot of domestic assets, it would probably turn to its affiliated mutual funds company.
LIC's major challenge now is restructuring investment management. With Deloitte it is establishing a new IT platform and has conducted its first-ever asset-liability matching. It also plans to start trading in interest-rate swaps next year, as Irda has just liberalized this area.
The LIC is also upgrading its technology for its national sales force and upgrading these agents' training. Although it remains a huge player, LIC does face nimble private-sector competitors, many with overseas partners. Its third major challenge is to introduce new products, particularly in the unit-linked area and eventually in pensions, as that industry develops.
