Stocks to take a hit if ban stays

STOCKS of Indian companies may take a knock in the near term unless the government steps in swiftly to resolve the stand-off between the two regulators—Sebi and Irda—on the issue of unit-linked insurance plans (Ulips), as a large chunk of funds raised through such plans is invested in equities. 

    Brokers and fund managers expect share prices to fall on Monday considering the growing flow of insurance money into the stock markets. Local insurance firms invested close to Rs 62,000 crore in equities in 2009-10, of which Ulips accounted for roughly Rs 50,000 crore, according to insurance industry estimates. These are gross estimates and do not take into account shares sold by insurance companies. Data has to be collated from industry estimates as Sebi does not provide a break-up of insurance firms' investments in equities. 
    A sizeable chunk of the premium collected by insurance firms through Ulips is invested in stocks, unlike traditional insurance plans, which predominantly invest in government securities and debt. State-owned Life Insurance Corporation (LIC) is the largest domestic institutional investor in equities. LIC pumped in Rs 50k cr last fiscal 
LIC had pumped in close to Rs 50,000 crore during the last fiscal. LIC has also been one of the biggest investors in initial public offerings (IPOs) and follow-on offerings (FPOs) of staterun firms, but the money invested in such issues has been primarily from its term plans. So to that extent, the bar on Ulips should not impact its plans of investing in upcoming IPOs. 
    Ulips are one of the major sources of money in stock markets, says Asit Kumar Nayak, senior manager, insurance product and branch sales, ICRA Online, an information services and database provider. "A ban on Ulips could cause a liquidity crisis. Such a move could suck out a lot of money from the markets," he added. 
    Over the last couple of years, Indian insurance firms have quietly emerged as a force comparable to foreign portfolio investors, or FIIs, which have a significant influence on the course of the markets here, given the funds at their disposal. During January-March 2009, for instance, Indian insurance firms pumped $2.5 billion into the market, even as foreign funds were dumping stocks across the board, and cushioned the fall to an extent. In all of calendar year 2009, FIIs invested close to $17 billion. "Sebi's ban will impact insurance companies and the market alike," said the chief investment officer of a private insurance company. "We will have no money to invest in equities if we don't sell Ulips. The problem will be worse if we are met with unforeseen redemption. In the absence of fresh investments, we'll be forced to sell stocks to repay investors," he added. 
    A booming stock market and fat commissions for distributors helped boost Ulip sales in the past few years. Insurance firm officials said Ulip investments accounted for 85-90% of the asset base of private insurers. The insurance industry collected Rs 2,20,000 crore last fiscal (2009-10) by way of premium alone. Stateowned LIC accounted for a significant chunk, mopping up Rs 1,35,000 crore. Industry officials said Ulips formed 65% of overall investment products sold by LIC. 
    Ulips are long-term insurancecum-investment products that allow investors to have stock market view-based exposure on debt and equity assets.