THE HINDU Editorial Vocabulary - July 2, 2018 - Topic 1

Risky recourse: on LIC's proposed stake in IDBI Bank

The Insurance Regulatory and Development Authority of India has approved a proposal to allow the Life Insurance Corporation of India to increase its stake in the ailing state-owned IDBI Bank to 51%. The plan envisages the insurer injecting much- needed capital into the financially stressed lender, which was placed under the Reserve Bank of India’s prompt corrective action framework in May 2017 as a consequence of its non-performing assets rising beyond a threshold. While there are no details on how exactly this capital infusion will take place — reports suggesting that the LIC may acquire the additional 40% stake it would need to reach 51% shareholding from the Government of India — market speculation and media reports have estimated figures north of ₹10,000 crore. 

While for the LIC the sum is a small fraction of the ₹1.24 lakh crore it received in just first-year premiums in the year ended March 31, 2017, for IDBI Bank the funds would almost equal the ₹12,865 crore in capital infusion it got from the government in the last fiscal. Whether this will be adequate to even staunch the flow of red ink at the troubled bank, leave alone help it turn around, is another matter. The bank posted a net loss of ₹8,238 crore in the 12 months ended March 31, 2018, and is facing the prospect of more losses with gross non-performing assets rising to 28%.

The proposal raises several troubling questions. The government clearly sees it as a relatively painless way to recapitalise the bleeding bank without adversely impacting its fiscal position, but the risks in increasingly banking on state-controlled cash-rich corporations to help bail out other state-owned companies or lenders are too significant to be glossed over. Then, there are the regulators. The IRDA, whose mission is to “protect the interest of and secure fair treatment to policyholders”, is reported to have exempted the LIC from the well-reasoned 15% cap on the extent of equity holding an insurer can have in a single company. This puts at risk the interests of the premium-paying customers of the LIC. The Securities and Exchange Board of India has in the past waived the mandatory open offer requirement under its takeover regulations when it involved a state-run acquirer and another state enterprise as the target. As the capital markets watchdog, SEBI has an obligation in all such cases to weigh the interests of the small investor. And the RBI, as the banking regulator, should not ignore the contagion risks that the level of “interconnectedness” the proposed transaction would expose the entire financial system to.

Vocabulary

Proposal: a plan or suggestion, especially a formal or written one, put forward for consideration or discussion by others.

Example: A set of proposals for a major new high-speed rail link

Synonyms: plan, idea, scheme, project, program, manifesto, motion, proposition

Envisage: contemplate or conceive of as a possibility or a desirable future event.

Example: The Rome Treaty envisaged free movement across frontiers

Synonyms: imagine, contemplate, visualize, envision, picture, conceive of

Consequence: a result or effect of an action or condition.

Example: Many have been laid off from work as a consequence of the administration's policies

Synonyms: result, upshot, outcome, effect, repercussion, ramification, corollary

Acquire: buy or obtain an object or asset for oneself.

Example: Instead, tax will become payable automatically 30 days after the date that the purchaser acquires the property or land.

Synonyms: obtain, come by, get, receive, gain, earn, win, be given, buy

Infusion: the introduction of a new element or quality into something.

Example: The infusion of $6.3 million for improvements

Prospect: the possibility or likelihood of some future event occurring.

Example: There was no prospect of a reconciliation

Synonyms: likelihood, hope, expectation, anticipation, odds

Adverse: preventing success or development; harmful; unfavorable.

Example: Taxes are having an adverse effect on production

Synonyms: unfavorable, disadvantageous, inauspicious, unpropitious, unfortunate

Significant: sufficiently great or important to be worthy of attention; noteworthy.

Example: A significant increase in sales

Synonyms: notable, noteworthy,remarkable, important, of importance

Mandatory: required by law or rules; compulsory.

Example: Wearing helmets was made mandatory for cyclists

Synonyms: obligatory, compulsory, binding, required, requisite, necessary

Expose: make (something) visible, typically by uncovering it.

Example: At low tide the sands are exposed

Synonyms: reveal, uncover, lay bare