ISLAMABAD (November 10 2008): The Finance Ministry is said to be facing stiff resistance from financial institutions which had been 'instructed' to buy shares of selected government controlled listed companies at prevalent prices, sources told Business Recorder.

They said that Ministry officials had met the top brass of NIT, State Life Insurance Corporation (SLIC), National Insurance Corporation, and other financial institutions and had asked them to set up a 'mutual fund' to benefit from the market opportunity of acquiring shares of certain government controlled listed companies.

They said that the financial institutions were of the view that while all the institutions were currently facing macro risks like inflation and uncertainty due to unsustainable twin deficits (current and fiscal), alongside credit downgrades, and all previous attempts to support equity market had failed, this was another attempt to invite institutional participation in the equity market through an even more complicated structure of Repo (Repurchase agreement) and 'mutual funds' with embedded options.

"The proposed fund structure does not address the fiduciary obligations of various participants who have a distinct asset liability profile," officials in the institutions said, according to sources.

Sources said that the Finance Ministry's directives are apparently an effort to shift banks' 'infected lending portfolio' (brokers and their equity portfolio) to a new group of clean borrowers ie government institution, at a frozen floor price.

"If 'floor' is removed these portfolios can be acquired at a substantial discount--of 15 to 25 percent--by the institutions," sources added.

They further said that SLIC, which is the biggest insurance company in the country, is of the opinion that it has its own asset/liability matching profile.

According to an Asian Development Bank study, SLIC equity portfolio should not exceed 18 percent of its total portfolio at market price, which has already far exceeded its exposure in equities.

The company had invested Rs 1.452 billion in equities from May 29, 2008 to July 18, 2008 to support the equity market, on the advice of Finance Ministry, besides investing Rs 1.580 billion in NIT stock market fund, set up in association with other government financial institutions with the intermediation of SECP.

Due to falling trend in the stock market there has been substantial erosion in SLIC's equity portfolio and if it invested further, it may suffer further losses, which would affect its bonus rate to policy holders.

"If the government has no other option of money injection in stock market, the company is ready to lend this amount to government to provide liquidity to the stock market," sources in SLIC added.

Copyright Business Recorder, 2008