LIC plans Rs1 trillion investment in non-government bonds

Mumbai: Life Insurance Corp. of India (LIC) has earmarked a total of around Rs.1 trillion for investments in bonds, including non-convertible debentures (NCDs), certificates of deposit (CDs), commercial papers (CPs) and collateralized borrowing and lending obligations (CBLOs), with primary focus on infrastructure and real estate in the year to 31 March.

This is at least 25% higher than the state-run life insurer’s investment in these instruments during the last fiscal. Two people familiar with the development confirmed this and attributed the corporation’s higher investment targets in these papers this financial year to positive growth prospects and consequently better returns on investment from infrastructure and real estate sectors of the country.

LIC, India’s largest domestic institutional investor, is the only state-run insurer with total assets worth at least Rs.20 trillion.

According to rules set by the Insurance Regulatory and Development Authority (Irda), an insurer is required to invest at least 50% of its investible surplus in government securities (G-sec), at least 15% in infrastructure-focused companies and the rest 35% in approved and other-than-approved instruments, including NCDs, CDs, CPs, equities, CBLOs and other money market instruments.

“The corporation plans to invest around Rs.3 trillion in financial year 2015, out of which not less than 50% will be invested in government bonds and the balance in corporate bonds and stocks, based on opportunities available in the market. The gross investment during the year 2013-14 was Rs.2.77 trillion,” LIC said in an email.

During the first half of the year, out of around Rs.1.57 trillion raised through debt papers, LIC commanded a market share of 30-35%, said the first person, one of the two cited earlier. A majority of demand for this money came from real estate and infrastructure sectors. LIC’s investment in infrastructure and real estate mostly involves projects for roads, railways and other transport systems.

This might continue even in the coming days, according to the two people, who declined to be named.

The first person said that last financial year, the insurer invested Rs.70,000-80,000 crore in these instruments.

“This year, investments in these instruments have been worth Rs.50,000-60,000 crore so far. This figure may go up to Rs.1 trillion by the end of this financial year, as still four months are left,” he said.

Recently, LIC chairman S.K. Roy said in a conference that the insurer may invest at least Rs.55,000 crore in equities during the year to March in the wake of increased opportunities and bullish market outlook.

A similar rationale is given for LIC’s increased investment targets in bonds. Traditionally, a majority of LIC’s investment in bonds, other than government bonds, have been focused on infrastructure and real estate projects and companies.

Though LIC invests only in bonds rated A plus or above, and the secured ones, for infrastructure and real-estate firms in the country, the state-run insurer has been the biggest lender for the development and expansion of their projects over the past several years. And a majority of investments in infrastructure and real estate by LIC is done through bonds like NCDs, CDs and CPs.

However, most of these investments by LIC are meant for the long term as the money being invested comes from sales of insurance policies, which have maturity periods ranging from 15 to 30 years, and sometimes even longer.

LIC may be justified in its strategy to increase its investments in NCDs this fiscal year, according to some experts.

“NCDs are attractive for long-term debt investors since they offer fixed rates when interest rates in the system are expected to go down,” said Vibha Batra, group head, financial sector ratings, ICRA Ltd. “Moreover, base rates are currently higher than the rates that highly rated corporate would get for its NCD. Hence it is also becoming a preferred medium for companies to raise money."

“The investment opportunities in these two basic sectors are huge in a developing country like India as the rate of return from investment in these sectors will be sufficiently high in the coming years as the demand is only likely to go up. The rate of interest now is between 8.5% to 10.5%. The returns on investment in infrastructure could be in the range of 10-12% in the coming years, while the rate of return in real estate sector could be even higher,” said the second person cited earlier.

LIC expects investors’ interest in infrastructure and real estate sectors to go up, and the money from household savings in banks will start flowing into instruments based on the growth of these two sectors.

“Now, at least Rs.16 trillion of public’s disposable income is in savings bank accounts only, and around Rs.60 trillion is in current accounts. And there is no interest on this huge pool of idle cash,” said the second person.

“The interest offered on investments in bank deposits is also falling. But there is a huge disposable money in the hands of the public, and since almost all sectors are growing now, a bulk of this disposable money can surely come to infrastructure and realty."

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.