IRDA Frowns On Plan To Set Up LIC-Led Credit Guarantee Fund

The government’s plan to set up a credit guarantee fund led by the Life Insurance Corporation of India (LIC) has failed to take off, said two people familiar with the development. The plan is now being reworked to ensure that India’s largest insurer only has a minority stake in the venture.

As part of the Union Budget announced earlier this year, the government had said that LIC will set up a “dedicated fund to provide credit enhancement to infrastructure projects.” The fund was intended to help raise the credit rating of bonds floated by infrastructure companies and make it easier for investors to invest in such bonds.

The insurance regulator, however, has raised concerns as it sees a conflict of interest in LIC providing credit enhancement to bonds that it may itself invest in, said the first person quoted above.

Credit enhancement is a process through which a highly-rated entity provides part guarantee to a bond issue being floated by another firm in a return for a fee. This guarantee helps companies improve their rating and raise funds at a cheaper rate.

In this case, the LIC-led entity would use its AAA-rating to help improve the rating of infrastructure companies for a fee. However, LIC is also a large investor in infrastructure bonds. As such, a credit enhancement provided by the LIC-led entity would stand to benefit the investment portfolio of LIC which would be a clear conflict of interest.

Emails sent to IRDA and LIC on Tuesday seeking comments were not answered.

According to the second person quoted above, the government is now working on a different plan as part of which LIC would only have a minority share in the credit guarantee firm which is likely to be led by India Infrastructure Finance Company Ltd (IIFCL). In addition, a number of banks may also hold minority stake in the venture.

The shareholding will have to be structured in a way to ensure that the entity is AAA-rated which would needed for meaningful credit enhancement, said the first person.(News Courtesy: bloombergquint)

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