What does the government’s plan to sell a part of its holding in Life Insurance Corporation entail?

The story so far: In the Union Budget speech on February 1, Union Minister of Finance Nirmala Sitharaman announced that the government proposed to sell a part of its holding in Life Insurance Corporation (LIC) by way of an initial public offering (IPO). The state insurer was established in 1956 through an Act of Parliament. Governed by the Life Insurance Corporation Act, 1956, every LIC policy is guaranteed by the government. Explaining the rationale for divesting the government’s stake in LIC, Ms. Sitharaman said that listing would bring discipline while giving retail investors an opportunity to participate in wealth creation.

What is the implication for policyholders?

Before the government divests a part of its stake through a public issue, it will have to ensure that it amends the LIC Act, which among other things, ensures a sovereign guarantee for all policies under Section 37 of the Act. The Finance Ministry is in talks with the Law Ministry to amend the Act. The top brass of LIC are, however, banking on a government assurance on the issue. In a media interaction on Friday, LIC Chairman M.R. Kumar said: “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.”

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 comparison, foreign portfolio investors had invested just over ₹65,000 crore into Indian equity up to February 8, according to data posted on the National Securities Depository Limited website.

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.

Analysts cite the offer for sale of Oil and Natural Gas Corporation Limited (ONGC) in 2012 as a classic example of an LIC bailout. The insurer was allotted a 4.4% stake in ONGC, part of the 5% sold by the government through the auction route. LIC purchased almost 90% of the shares offered, taking up its holding to 9.48%, just under the permitted ceiling of 10% under insurance laws.

Also Read LIC stock market listing: Government yet to take call on quantum of stake sale

Questions were raised in the market at the time about its investment policies but since LIC was completely owned by the government, not much came of it. Analysts say this is the interesting part about the proposed listing. The listing would usher in benefits including increased accountability, transparency and due process. There would be independent directors on board who could question the rationale for investments. Further, shareholders too could question the company on its investments. “We are yet to do the math,” said Mr. Kumar when asked how investment norms would change post the proposed listing. “Generally, whether we are listed or not, we have to follow the same investment [norms],” he added.

Could listing change the payout structure at LIC?

Quite likely, according to analysts. 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?

At a time when all banks are reeling under the pressure of bad loans there is intense speculation on LIC’s non-performing assets (NPAs). While media reports have posited that LIC has about 6% gross NPAs. Mr. Kumar, however, clarified that on an overall basis, it was not even 1%. He said, “For us, most investments are in equity, government securities and a small part in corporate debt. The 6% is possibly in corporate debt. But overall, it is hardly 1% in gross [terms]. Since we made provisions, net [NPAs] is 0.04%.” LIC’s total assets amounted to ₹32.26 lakh crore as of September 2019.