Indian Economy, Uncategorized

LIC stake sale

  • Union Minister of Finance announced that the government plans to sell a part of its holding in Life Insurance Corporation (LIC) by way of an Initial Public Offering (IPO).
  • The government owns 100 per cent of LIC.

Establishment

  • The Life Insurance Corporation of India was established by the Parliament by passing the Life Insurance Corporation Act in 1956.
  • The objective was to spread life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.

Why did the Govt initiate this?

  • The Govt believes that listing would bring discipline while giving retail investors an opportunity to participate in wealth creation.
  • Listing of companies provides access to financial markets and unlocks its value.

To bring this into action the Govt will have to ensure that it amends the LIC Act

  • LIC is currently under the supervisory oversight of the Insurance Regulatory Development Authority of India (IRDAI), but it is governed by the LIC Act of 1956 which enables the state-owned insurer to obtain a special dispensation in several areas including higher stakes in companies beyond the limit set by the IRDAI.
  • Under Section 37 of the LIC Act, the government has guaranteed the sum assured with bonus in all LIC policies to ensure the availability of financial security to the family of the deceased.
  • LIC Chairman M.R. Kumar however has confirmed that: “There is no implication for policyholders. The Finance Minister has clarified that sovereign guarantee will continue. That being the case I don’t think there is anything to worry for the customer.”
    • Sovereign guarantee means that the sum assured in your policy, including bonuses, shall be guaranteed by the government.
    • This means it’s a surety or an undertaking from the government that it will pay you the assured sum (including bonus) on your policy.

The Finance Ministry is in talks with the Law Ministry to amend the Act.

Will listing change LIC’s operational approach or investment policies?

  • LIC is the biggest institutional investor in the Indian equity markets. According to media reports, LIC’s gross investments in equity are set to touch an all-time high of ₹72,000 crore in the financial year 2019-20.
  • In FY19, LIC had invested a little less than ₹69,000 crore in equities. The numbers clearly show the clout that LIC enjoys in the equity market. The government has used LIC on many occasions to stabilise the markets.

Example

  • The offer for sale of Oil and Natural Gas Corporation Limited (ONGC) was initiated by Govt in 2012
  • LIC was allotted 4.41 per cent stake in ONGC, part of the 5% sold by the government through the auction route.
  • With the acquisition of 4.41 per cent, LIC’s stake in ONGC has gone up to 9.48 per cent
  • As per the Insurance regulator IRDA guidelines, an insurance firm’s holding should not exceed 10 per cent in any company.

Questions were raised in the market at the time about its investment policies, as this was a classic example of an LIC bailout.

Merits

  • The listing would usher in benefits including increased accountability, transparency and due process.
  • Listing of LIC will bring in greater governance and unlock more value for the life insurer, which could in turn benefit policyholders.
    • Listing a company will lead to its service standards going up.
  • There would be independent directors on board who could question the rationale for investments.
  • Further, shareholders too could question the company on its investments.
    • The government then cannot use LIC as a bank for acquisitions like IDBI, IL&FS, etc.
    • It will stop adverse investment decisions because once listed, SEBI and IRDA will have to be convinced.
  • Market observers are also of the opinion that listing LIC will give it more marketing muscle and make it competitive, which will mean that private players will now have to invest more and bring out more innovative products.

Concerns

  • LIC employee unions say that listing LIC will adversely affect policyholders.
    • They believe that for a company performing so well, there is no need for disinvestment, just because the government needs money.
  • Once LIC is listed, there will be more ‘owners’ of the company in the form of shareholders, which will mean that a portion of profits will have to go to them as well.
    • It may reduce the bonuses that policyholders currently receive.

Could listing change the payout structure at LIC?

  • Currently, LIC pays 5% of its surplus to the government and the balance 95% to policyholders.
  • This makes it possible for the state-owned insurance company to give a higher bonus on the policies compared to private players, who typically give 10% of their surplus to shareholders and the balance 90% to policyholders.
  • With outside investors becoming shareholders, with a few even gaining seats on the insurer’s board, there could be a demand to tweak the mix between shareholders and policyholders.
  • Further, the norms of the Securities and Exchange Board of India (SEBI) on corporate governance would require the insurance company to make timely and quick disclosures about defaults among other things.
  • LIC is a significant player in the debt segment as well and would have to make additional disclosures to retail shareholders.

Does LIC have bad loans?

  • The banks are currently reeling under the pressure because of bad loans, there is intense speculation on LIC’s Non-Performing Assets (NPAs) too.
  • Media reports have speculated that LIC has about 6% gross NPAs.
  • But the chairman of LIC, clarified that on an overall basis, it was not even 1%.
    • The 6% is possibly in corporate debt.

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