After market participants rejected the investment and silently condemned LIC's last-minute purchase of ONGC shares to help the issue sail through, the criticism has got political.
"This is daylight robbery," BJP leader Yashwant Sinha said. "LIC is a captive source of funds for the government. They have misused the status of LIC to misappropriate policyholders' money and brought it to the government's coffers through the ONGC disinvestment."
Sinha, chairman of the Parliamentary Standing Committee on finance, was commenting on what is being seen as virtual arm-twisting of Life Insurance Corporation of India (LIC) by the government to invest in the auction of ONGC shares the government was disinvesting. Because of acute lack of investor interest in the issue, it almost bombed.
That was when the government got into action and reportedly got LIC to buy more than Rs 11,450 crore worth of shares, about 84% of the total auctioned last week. As a result, policyholders of Life Insurance Corporation of India (LIC) are sitting on a notional loss of Rs 900 crore.
"I hope to god that this is the last time that they misuse and misappropriate the funds of public sector undertakings and try to bridge the fiscal deficit by this strategy," the former finance minister said.
The question is how to make LIC autonomous such that government interference does not hamper its role as the guardian of policyholders' money. "This needs to be answered, needs to be looked into in detail. But adhoc measures are not the answer. Appropriating their surplus and pushing them into losses is not the way."
Had any private sector company done this, the government's investigative agencies would have sprung into action within minutes. Insurance Regulatory and Development Authority (IRDA), the insurance regulator, for instance, would have asked difficult questions.
"If there are regulatory issues, IRDA needs to deal with it," Sinha said. "There must be a level playing field between LIC and other private insurers. Just because LIC has been formed under an Act of Parliament doesn't mean it is debarred from regulatory oversight."
Capital markets regulator Securities and Exchange Board of India would have launched an inquiry as to how a transaction so large was allowed after market had closed. The government's view that "technical glitches" botched up the issue is not an argument that would be allowed to any private promoter.
"There were certain buy orders which were not immediately confirmed or were erroneously rejected by custodians due to a mismatch at the custodian end, even though, the orders were funded," the two exchanges said in a joint statement. So, while the exchanges seem to be in the clear, the role of the custodian, Stock Holding Corporation of India, remains fuzzy. Is it going to be the fall guy?
Finally, this transaction would have faced questions on governance — that is, how the government bypassed the entire board and got LIC to part with policyholders' money in just a few hours.
"Why should the government take a decision on behalf of any PSU, including LIC? The government has its representative on the board and whatever ideas you want to give should be given through this representative," Sinha said.
Bringing the fiscal deficit under control is crucial --- but not at the cost of market integrity. By indulging in this face-save, the government is sending a strange message to the market: if we can't play cricket, we'll change the field to football.