LIC rescues investors with ‘unwanted’ bonds

By M H Ahssan

Life Insurance Corporation of India (LIC) has come to the rescue of investors saddled with special bonds issued by the government, which are failing to find buyers. The special bonds include oil, fertiliser and food bonds, which were issued by the government to make up for unfunded subsidies. However, demand for these bonds had declined after the government announced that it would borrow much more through the issue of bonds. Fortunately for the investors in these bonds, LIC has been buying a large chunk of these bonds.

During the weeks following October, when interest rates started falling, activity in these quasi-government bonds was at its peak. It was widely believed that spreads — yield in premium over sovereign bonds — would shrink in the coming days, enabling traders to make some money. But with the government announcing its plans to sell more bonds, activity in this space quickly dried out. “We are long-term investors, and have been investing in these quasi-government bonds as their yields have been slipping,” said N Mohan Raj, executive director, investment operations at LIC.

The worst-affected in the market turmoil was the fertiliser bonds. These long-dated securities progressively lost value to trade at a yield of 7.70-7.80% against an original yield of 7%. “We simply dumped our holdings in the market to cut losses. We understand that LIC bought some of the bonds,” said an official at a private sector bank. The total quantum of fertiliser bonds in the system is in the range of Rs 20,000 crore, with LIC now estimated to own bonds worth a few thousand crores.

But bankers say fertiliser companies, which were more keen to get cash in lieu of bonds at one point, are getting bank loans at decent rates these days. So, they are now reluctant to sell their bonds at a discount. On the oil bonds front, LIC is the second only to the Reserve Bank of India in picking up bonds, said Mohan Raj. The RBI had restarted buying oil bonds from three state-owned oil marketing companies (OMCs) from November 26 last year, buying over Rs 10,000 crore in December itself. Oil company officials say a new set of issuance from the government is in the offing.