Stinks to High Heaven: Air India Bailed Out by Life Insurance Corporation (LIC) of India

Against a backdrop of rising concerns over NPAs in the banking system, it was reported that Air India was looking at the possibility of availing a new scheme, the Scheme for Sustainable Structuring of Stressed Assets (S4A), to rejig debt to the tune of a minimum of Rs 100 Bn. Since 2012, the airline has been on a life support with a Rs 300 Bn bailout package from the government, spread over ten years. In fact, this may be one of the biggest sums that LIC has ever loaned out till date: this new loan to Air India of Rs 100 Bn (If that number is correct), will grow its loan book by an enormous 9.26%.

Who reported this? A Secret deal? Was it leaked?

Since, at the time of writing, Air India has made available annual reports only until FY 2013-14, all the financial figures and plans of rejig coming out in the newspapers, if true, are very likely being leaked from Air India/ Civil Aviation Ministry itself, and being dealings in material non-public information, this constitutes a situation of non-uniform dissemination of sensitive information, and possible violation of securities law.

short-pbnks-up

Indeed, the public sector bank index was up by a chunky 1.5% today, being the first day since the story broke, with two of the three stocks mentioned in the story (Bank of India, Bank of Baroda) up over a per cent and the third stock (Punjab National Bank) within 3% of its 52-week high.

Best of socialism at its worst?

There are many facets to this development that stink to high heaven. As Firstpost pointed out – Why the bailout when it was already turning around? It has also been queried before on multiple occasions when LIC was bailing out public sector Companies and investing aggressively in public sector disinvestments, who has the authority to approve this and why isn’t there a public outcry? And all this for a saving of Rs 3 Bn (A 3% saving on Rs 100 Bn), which Air India could save anyway by paying its fuel bills on time, as has been reported here by the Business Standard.

Hypocrisy unlimited

Arun Jaitley: “LIC is not a body which invests only to bailout the government in disinvestment. In issues by private companies, LIC also participates.”

That’s right. The (dis)honorable Finance Minister had agreed, last year, that LIC bails out & bails out repeatedly. And that LIC, with the public’s insurance money, routinely bails out private Companies too!

The government speaks highly of transparency and accountability, yet hijacks the public treasury to bail out desperate banks and monopolies, placing an incremental debt burden on the public.

Here’s another quote from ex- Finance Minister, Yashwant Sinha, a senior leader of the current ruling party, while he was in opposition in March 2012, around the time LIC bailed out ONGC’s disinvestment auction with an unnecessarily high-priced bid:

“LIC is a captive source of funds for the government. They have misused the status of LIC to misappropriate policyholders’ money and brought it to the government’s coffers through the ONGC disinvestment.”

Now that his party is engaged in the same treasonous act, in his own words, a “daylight robbery”, I’m sure he will stand up for the public and do everything in his power to stop this transaction.

Fat chance!

A case of honest kleptocracy

But the Bullish Bear wouldn’t write this if there wasn’t a silver lining to this all. There is an honest side to this, y’kno.

This bailout has proved that the government can openly rob the public of its money, via the LIC, to bail out bankrupt Companies.

Such instances of naked cronyism can at least serve to warn the public that their savings and insurance are at risk. The Life Insurance Corporation of India is not a safe house, nor are any of these banks offering 4-7% return on savings, making loans to extremely indebted Companies while maintaining tier-I ratios of just 10%.

Related reading: Debt-ridden Government makes more claims on LIC (NDTV Profit) >>

This amounts to a rather more transparent & direct socialistic involuntary bailout. Which is bad no doubt, but incrementally better than an indirect socialistic involuntary bailout! As Canadian billionaire and philanthropist Eric Sprott warned, “Whenever you think of the word bank, you should think risk.”

For a brief education on bailouts funded with public money, it can’t get any better than this short video segment, in which Peter Schiff, an Austrian economist and a guru & mentor to yours truly, lambasts a pitch for a government sponsored bailout of American car manufacturers by Lansing, Michigan Mayor Virg Bernero on live television! “If you think these Companies are such good investments, you put your own money into it!”

In conclusion

As mentioned previously, the Bullish Bear is an ardent fan of free markets and open competition. Yet, I have sympathy with Air India’s Chairman & Managing Director, Ashwani Lohani. Coming from the head of a public sector enterprise, these are astonishing words, admitting that a public sector entity does not really care about the delivery of its services. Although he does shy away from writing the public sector off completely, the Bullish Bear believes that he is headed in the right direction!

“Often my airline is questioned on its inability to match the private sector on various operating parameters, and this is unfortunately always done without due appreciation of the fundamental reality that there is no level-playing field… A course correction is the need of the hour, for contrary to what many may think, the public sector has still not lost its relevance in entirety… Unless and until we all, and that includes the mighty government machinery, start believing in the supremacy of deliverance over everything else, such dilemmas would always continue.”