Finance ministry okays LIC’s Rs 1.5 lakh crore funding of Indian Railways

Finance ministry okays LIC’s Rs 1.5 lakh crore funding of Indian Railways

MUMBAI: Life Insurance Corporation of India can now go ahead with its proposed Rs 1.5 lakh crore funding of the Indian Railways, with a finance ministry clarification effectively nullifying the sector regulator’s concerns and demand for sovereign guarantee for the investment.

The state-run insurer had signed a memorandum of understanding two years ago to invest in the railways through bonds issued by the Indian Railway Finance Corporation (IRFC). But since this would take LIC’s exposure to more than 25% of IRFC’s net worth — it has to keep the investment within that limit in any company involved in infrastructure, debt and equity included —the insurance regulator demanded explicit government guarantee for the bonds and a gazette notification classifying these as special securities, like oil bonds.

On November 23, the finance ministry issued an order, clarifying that the IRFC bonds can be treated as approved security for investment above the exposure limits. It didn’t offer any government guarantee on the bonds, but said the bonds were covered by Section 2(3) of the Insurance Act under which the repayment is charged on the revenue of the railway ministry.

The railway ministry’s revenue, in turn, is backed by budgetary allocation. The charge on the central government revenue is more than a government guarantee, as it amounts to express intention of the government to pay out the obligation, whereas payment against guarantee will happen only when the guarantee is invoked, the finance ministry said.

The clarification was issued after the railways, Insurance Regulatory and Development Authority of India (Irda), LIC and the finance ministry discussed last week whether this investment in the railways could be classified under approved investment category with higher limits, without any explicit government guarantee.

Having LIC to invest in the bonds would reduce the cost of borrowing for the railways, at a time when the national transporter is working on ambitious projects including electrifying the entire network over the next few years. Piyush Goyal, who took charge as the railway minister in August, had said that the railways was looking at investments of nearly Rs 10 lakh crore over five years.

The insurance regulator had sought special status for the bonds as it wanted to ring-fence the funds that belonged to millions of common insurers. Sovereign guarantee would also ensure the bonds’ high investment grade credit rating. At the meeting, the Railway Board was of the view that investment in the railways should come under the approved category of investment without the need for an explicit government guarantee.

Under this category, an insurance company can invest up to 70% of its assets under management in instruments, including AA-rated bonds and government securities.

“LIC is agreeable to the idea of the ministry of finance issuing a clarificatory order for treating IRFC bonds as approved security for additional investment by LIC in IRFC over and above the exposure limits,” a letter from the ministry of finance sent last Thursday to the participants of the meeting said.

The letter, signed by T Uthaya Kumar, additional budget officer in the Department of Economic Affairs, said the government took the view of a law firm and the additional solicitor general on the matter.

The ASG stated that the investment by LIC was secure as it was backed by clear budgetary allocation and IRFC bond was in the nature of approved security by virtue of charge created in favour of LIC on the revenue of the central government, it said.

Kumar said Irda’s point on classifying IRFC bonds as special bonds or oil bonds was not relevant, as oil bonds issued to oil marketing companies were made marketable and investments in such instruments by insurance companies were secondary in nature. The letter said special securities to oil marketing companies were government securities and need not be defined as approved security.

At the end of June 30, LIC had total assets under management of Rs 24.74 lakh crore, including equity and debt. LIC has an 80% share in the AUM of the life insurance industry.

Of the total investment, Rs 5.74 lakh crore is in equities and Rs 19 lakh crore in debt, which includes central government securities, state government securities and corporate bonds. LIC has come to the rescue of the government on many occasions by investing in bonds and shares of state-owned companies.

Source: ET