The country's largest life insurer, the state-owned Life Insurance Corporation of India, can now proceed with its proposed INR1.5 trillion (US$23.3 billion) funding of Indian Railways.
This follows a Finance Ministry clarification effectively nullifying the sector regulator's concerns and demand for sovereign guarantee for the investment, reported The Economic Times.
LIC had signed a memorandum of understanding two years ago to invest in bonds issued by the Indian Railway Finance Corporation (IRFC). But as this would take LIC's exposure to more than 25% of IRFC's net worth — it has to keep the investment within that limit in any company involved in infrastructure, debt and equity included —the insurance regulator demanded an explicit government guarantee for the bonds and a gazette notification classifying the bonds as special securities.
On 23 November, however, the Finance Ministry issued an order, clarifying that the IRFC bonds can be treated as approved security for investment above the exposure limits. It did not offer any government guarantee on the bonds, but said the bonds were covered by the Insurance Act under which repayment is charged on the revenue of the Railway Ministry. The Railway Ministry's revenue, in turn, is backed by budgetary allocations. The charge on the central government revenue is more than a government guarantee, as it amounts to an express intention of the government to pay the obligation, the Finance Ministry said.
The clarification was issued after the railways, IRDAI, LIC and the Finance Ministry discussed whether the proposed investment in the railways could be classified under the approved investment category with higher limits, without any explicit government guarantee.
Having LIC invest in the bonds would reduce the cost of borrowing for the railway corporation, at a time when the national transporter is working on ambitious projects including electrifying the entire network over the next few years.