LIC may buy SUUTI assets
Life Insurance Corporation of India (LIC) will likely step in to buy between a third and half the equity assets of the Specified Undertaking of the Unit Trust of India (SUUTI). The purchase from SUUTI, an offshoot of the erstwhile Unit Trust of India (UTI), could mean spending of between Rs.25,000 crore and Rs.30,000 crore for the state-run insurer, and an equivalent windfall for the government.
With assets worth at least Rs.20 trillion, LIC has often come to the government’s rescue in large divestments. In recent months, the government has also leaned on the insurer to support a number of its other initiatives: offering soft loans to the railways, subscribing to the power sector’s Ujwal Discom Assurance Yojana bonds and investing in the National Investment and Infrastructure Fund.
Now, the government has asked LIC to buy a significant part of the assets of SUUTI, which holds minority stakes in many listed and unlisted companies. SUUTI has shares in 43 listed and eight unlisted firms. It holds 11.17% in ITC Ltd, 8.32% in Larsen and Toubro Ltd (L&T) and 11.93% in Axis Bank Ltd.
SUUTI also holds shares in other blue-chips such as ICICI Bank Ltd, Bharat Petroleum Corp. Ltd, Hindustan Unilever Ltd, Titan Co. Ltd, Tata Steel Ltd and Reliance Industries Ltd. The combined value of SUUTI’s holdings in listed firms is estimated at around Rs.60,000 crore. The value of its holdings would be higher if its shareholding in unlisted firms is taken into account.
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Being a long-term investor, LIC can take contrarian calls and large positions in companies if the investment benefits its policyholders, shareholders and fits its long-term growth plans. One challenge that LIC could face is the regulatory restriction on equity holdings in individual firms. The Insurance Regulatory and Development Authority of India allow the insurer to hold maximum equity of 15% in a single company.
If the government sells a significant chunk of SUUTI’s holdings to LIC, the state-run insurer, which already owns shares in many blue-chips, the 15% limit could be breached in some companies.
According to Sanjay Sinha, founder of Citrus Advisors, an investment advisory, the government’s plan may be a prudent approach to ensure that its divestment target is met. A meeting between SUUTI officials and merchant bankers was scheduled for 15 July in Mumbai. Bankers will be required to submit their bids by 1 August. The government, along with SUUTI, will shortlist up to three merchant bankers to handle the sale.
India’s Parliament bifurcated UTI in 2002, creating SUUTI and UTI Asset Management Co. Pvt. Ltd, the former holding the assured-return investment plans of UTI and the latter overseeing market-linked plans. The bifurcation took place after UTI’s US-64 investment scheme ran into trouble.
The government has considered selling SUUTI assets several times in the past. This time, the decision has been driven by the need to meet an ambitious divestment target and a conducive market environment.
The benchmark BSE Sensex has rebounded about 21% to 27,808.14 points on Tuesday from its lowest closing this year of 22,951.83 points on 11 February. This could help fetch attractive valuations for the holdings.
The government has an ambitious divestment target of Rs.56,500 crore for 2016-17, of which Rs.36,000 crore is expected to come from minority stake sales in state-owned companies. The remaining Rs.20,500 crore is expected to be raised through strategic sales in both profit-making and loss-making state-owned companies. So far this financial year, the government has raised Rs.2,716.55 crore from a stake sale in NHPC Ltd, according to the department of investment and public asset management.
The market has been generally good and the investor confidence is clearly returning as is evident from the performance of recent primary market offers. The government finds this the best period to sell its holdings in domestic firms held through SUUTI.