LIC has lost ₹17,000 crore in PSBs in a year; mergers could worsen erosion

LIC, that has seen its investment in IDBI Bank (classified as a private bank now) erode by more than half over the past year or so, has also seen the value of its investments in other PSU banks plunge. The sharp fall in the price of PSU bank stocks and dilution of its stake owing to capital infusion by the government, has eroded its wealth in these banks. LIC has lost over Rs 17,000 crore of its wealth in PSBs over the past year. Excluding IDBI Bank, it has lost over ₹4,800 crore in other PSBs.

The Centre’s big bank merger movewould only hurt the insurer more in the coming months. A sharp 20-30 per cent dilution in the book value of the merged entities — PNB, Canara Bank, Union Bank and Indian Bank — over the next year or so, will lead to LIC’s value of holdings in PSU Banks erode further.

Infusion at abysmal valuations

The government infusing capital year after year into public sector banks, has eroded value for investors. This is because most PSU banks trade at a steep discount to their book value, and hence the government infusing capital at such low valuations, immediately leads to dilution in equity base.

In FY19, the Centre infused ₹1.06 lakh crore into banks, most of which were trading at 0.4-0.6 times their book value. The dilution in book value owing to the government’s capital infusion has hurt minority shareholders including LIC.

For instance, in case of Corporation Bank, the government infused ₹11,641 crore in FY19. For this, it was allotted shares in the bank in two tranches — 86.9 crore shares at ₹29.4 each in October 2018 and 340 crore shares at ₹26.68 in March 2019. The book value of the bank in the December 2018 quarter stood at ₹54.9 (as per the bank’s presentation) — double that of the price at which shares were issued