India Inc is dialling the Life Insurance Corporation of India to bail it out in an uncertain investment climate.
The largest domestic institutional investor in the country is flooded with enquires from a number of companies for investing in their debt papers.
Sources familiar with the developments say the requirement submitted to LIC is to the tune of Rs 30,000 crore (Rs 300 billion).
However, LIC's hands are tied by regulations, which mandate 75 per cent of its debt investments should be in AAA-rated papers.
"There are a lot of good companies which have AA+, AA, AA- and A+ rated issues. With the market appetite for these being low, they are looking up to LIC for bailing them out," the sources say.
Consequently, LIC has approached both the government and the Insurance Regulatory Development Authority (Irda) to get some leeway in debt investment norms.
If sources are to be believed, the government is actively considering the request.
There have been instances in the past when LIC was given some relaxation in investment norms, and allowed investments in up to A+.
Debt investment regulations do not allow investments beyond A+, says a senior Irda official.
"However, the problem of allowing such relaxation is that, if a downgrade happens on A+ rated papers, it slips to BBB or below, wherein the investment category would then fall under another investment bucket.
Hence, we keep some room to protect the downside," he adds.
Going by LIC's investment target for the current year, estimated at Rs 2 lakh crore (Rs 2 trillion), at least Rs 1.5 lakh crore (Rs 1.5 trillion) would be invested in debt.
This means around Rs 1.12 lakh crore (Rs 1.12 trillion) should be invested in AAA-rated papers.
However, going by the market conditions, there are not enough AAA-rated
"Given the increasing sale of traditional policies and volatility in the capital market, debt investments will play a critical role, if LIC is to meet its investment target during 2011-12," says another source, requesting anonymity.
So far, during the first six months of the current financial year, LIC has invested Rs 54,000-55,000 crore (Rs 540-550 billion), of which debt investments accounted for more than Rs 40,000 crore (Rs 400 billion.
According to ratings agency Crisil, AAA-rated entities do not even constitute five per cent of its rating universe.
"There is good appetite for AAA-rated papers but only a few issuers tap the market on a regular basis. Moreover, investors like insurance companies and banks may not be keen to invest in lower-rated papers because of investment limits," says Arvind Konar, head of fixed income at Almondz Global Securities.
For instance, according to market participants, Power Finance Corporation with an AAA rating was able to garner around Rs 200 crore (Rs 2 billion) in a recent issue of tax-free bonds, while collections for a similar issue of lower-rated Hudco was significantly lower.
Top-rated papers being the least risky offer the lowest spreads on comparative government security yields.
At present, spreads between a 10-year AAA corporate bond and the government bond of the same maturity are 65 basis points while the spreads between 10-year AA+ and the government bond of the same maturity are at 128 basis points.
Spreads have shrunk after the yields on government bonds moved up on the announcement of a higher supply in the second half of the financial year.
