LIC a time bomb left by UPA for NDA By MR Venkatesh The financial assistance to Unitech was provided by LIC way back in 2008 even as the 2G spectrum scam was unfolding. â€œThis case is a blatant example of a deliberate bid to benefit a private party to the detriment of LIC. It involves acting completely contrary to law, repeated misleading of Investment Committee, submission of untruths to the DFS to mislead and gross administrative incompetency or undue benefit being extended to a persistent defaulter.â€ This is the observation of a senior official within the Finance Ministry (who incidentally demitted office on March 31, 2014) on a note on Assistance provided by LIC to a private Company and submitted by Anna Roy, Director Vigilance to Finance Ministry on March 26, 2014. The senior official goes on to add, â€œStrong disciplinary action leading to inflicting of major penalty is clearly attracted in this case at all involved levelsâ€ and observes despite â€œrepeated defaults by the private companyâ€ senior officers of LIC â€œwent on to provide undue relief.â€ As a parting kick he concludes, â€œThe involvement is clearly established at the levels mentioned in the note right from the beginning of the case from its sanction till 2014.â€ Well, who is the alleged beneficiary from this largesse by LIC? Unitech â€“ the very same company that is one of the accused in the 2G spectrum case. Importantly, the financial assistance was provided by LIC way back in 2008 even as the spectrum scam was unfolding! Interestingly, there are several parallels with the 2G scam. For starters, the vigilance note observes several irregularities relating to this transaction at various stages including appraisal, approval, sanction and post sanction/disbursement. In short, from beginning to the very end, the vigilance note observes gross violation at every level as in the 2G scam. What is galling is that the vigilance note observes that records available clearly indicate that LIC was aware from the very start that the company was regular in its payment to other lenders while defaulting on its dues to LIC. LIC in several of its communications had also raised this issue pointing out that the company was wilfully not meeting the dues of LIC. However, no action was taken to declare the company as a wilful defaulter. Shockingly, as per the statement of the Executive Director to the vigilance team, it appears that LIC has no monitoring mechanism to review status of such accounts! And remember all this is being lent in such reckless manner and without appropriate systemic checks and balances is the money of innocent policy holders of LIC. The case in brief LIC had sanctioned Rs 200 crore term loan to Unitech in 2008. The facility was restructured when the outstanding term loan was Rs 160 crore by allowing extension in repayment schedule from 01.03.2010 to 07.06.2015. In August 2013 Unitech made another request for restructuring even as the proposal was not supported by the Investment Committee. Incidentally, after the original sanction was provided several terms and conditions of the loan, including identified project was revised with the approval of the then chairman even as IC was â€œinformedâ€ about these changes. Such unilateral decision of the Chairman dynamited the very idea of an IC and had the calculated effect of converting the Rupee Term Loan into a corporate loan even as it compromised on the payment security mechanism of LIC. Simultaneously LIC purchased Non-Convertible Debentures [NCDs] issued by Unitech to from LIC mutual fund in a secondary market transaction. Since these were non-approved securities such purchases required approval of the IC which was not obtained and thus violated the IRDA guidelines and SOP of LIC. Therefore the Chairman violated the terms and conditions relating to the investment operations of LIC. Put pithily, the vigilance note brings about the following lapses / violations / malpractices by various officials of LIC including Board level appointees at different points of time: Â» Undertaking secondary market transactions without prior approval of the IC. Â» Post sanctions by IC, major modifications were made in sanction terms and conditions without approval of IC. Â» Did not insist with the company to execute Escrow Agreement. Â» Did not initiate legal action against the borrower when the post-dated cheques issued by the borrower were dishonoured. Â» Did not resort to foreclose the assets pledged as collateral with LIC to recover its dues. Â» Did not attempt to declare the company a wilful defaulter even when there was evidence that the company was meeting the dues of its other lenders, declaring dividends etc. Â» Seeking the approval of IC for restructuring without presenting all facts to the IC. Â» Did not take necessary action under the SERFASI Act leading to a delay in taking action. Â» Delayed in declaring the borrower a wilful defaulter. Â» Delayed action to revise the SOP of LIC to address extant lacunae in the extant procedures and practices of LIC. A rule not an exception If you thought that the loan to Unitech was an exception, you could be wrong. If you thought LIC was lax in sanctioning loans, again you could be wrong. It would seem that LIC virtually was completely lax in the issue of investments â€“ Loan or equity, primary or secondary market. Another vigilance note issued by Anna Roy, Director Vigilance on March 31, 2014, observes several inconsistencies in the daily mandate given by various fund managers. It concludes that the financial delegation exercised by Chairman LIC with respect to purchase and sales of equity related instruments was beyond the powers delegated by the Board. Further, on examining a sample of the purchase and sale of shares of companies during January 31, 2014 to February 7, 2014, it was observed that there were several instances where LIC has purchased and sold shares of the same company either on same days or consecutive days. It was further observed that in several cases, a substantial number of shares of a single company have been purchased over a period of one week, even though the approved mandate for purchase of such shares was valid for one month. At times, there were purchases at higher prices and sales at lower prices which adversely affected the interest of LIC and policy-holders. Moreover, the note rightly observes that â€œsignificant purchase of shares of a single company over a very short period has the potential to impact stock markets.â€ Most of the irregularities on investments pertain to period between 2008 and 2014. It is obvious, given the observations of the vigilance team that in the world of investments carried out by LIC, much of the actions are suspects. But much of what is stated here has taken place quite a few years back and even at this stage we are yet to name the suspects. One is sure given the observations contained in the note of by the vigilance team, several loans and equity purchases made by LIC are suspects. In the alternative, the borrower has immensely benefitted by the reckless or casual approach of LIC. Either way it is the innocent policy holder who has been at the receiving end. Rs 500 crores may be small number in the context of Rs 17 Lac crores balance sheet size of LIC. But such Halal of its fund cannot continue endlessly. Remember that LICâ€™s policies are backed by sovereign guarantee. And any crisis within LIC is bound to have an impact on Indiaâ€™s financial sector. It may be recalled that in a two part series titled â€˜Shunned for LIC, Selected for IRDAâ€™ and â€˜A splendid example of Congress nepotismâ€™ in NitiCentral, I exposed how the present chairman of IRDA, TS Vijayan was originally found to be unsuited to be even the MD of LIC. In fact, the Finance Ministryâ€™s internal note pointed out that pending a vigilance clearance, it would be inappropriate to even consider him to the position of MD but would have to be reverted to the position of ED/ZM. Strangely, a person who was considered unfit in 2011 to be Chairman of LIC, and the Ministry of Finance considered him inappropriate to be appointed even as the Managing Director of LIC was short-listed in late 2012 for the post of Chairman IRDA â€“ the insurance regulator which ultimately controls LIC! Shockingly, the then Finance Minister in January 2013 goes on to select TS Vijayan in view of his â€œsplendid record.â€ Needless to emphasise, the appointment of Vijayan continues to haunt the insurance industry. Emboldened by such appointments, I understand that some of the decision-makers with a suspect track record in LIC are now queuing for an appointment as a member of IRDA. Importantly, all is not well in the world of investments made by LIC. This needs to be fixed at the earliest. The vigilance team has already done the basic investigations. All it requires is a quick follow up though decisive action. How about beginning with an action on all those who were at the helm of affairs at LIC with dodgy track record? How about suspending such persons pending an enquiry? How about postponing any decision on appointing such persons to any regulatory appointment pending outcome of such enquiry? The new Finance Minister must realise that LIC is a ticking time bomb left behind by the outgoing UPA. The earlier it is acted upon the better for him and the NDA Government. Disclaimer: Opinions expressed in this article are the author's personal opinions. Information, facts or opinions shared by the Author do not reflect the views of Niti Central and Niti Central is not responsible or liable for the same. The Author is responsible for accuracy, completeness, suitability and validity of any information in this article.