Privatisation OF LIC – Burning Issues

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Finance Minister Nirmala Sitharaman announced in her Budget 2020 speech that the government will sell a part of its holding in Life Insurance Corporation of India (LIC) through an initial public offering (IPO)
The Parliament of India passed the Life Insurance of India Act on 19 June 1956 creating the Life Insurance Corporation of India, which started operating in September of that year.
It consolidated the business of 245 private life insurers and other entities offering life insurance services

India’s largest financial institution

The government owns 100% of LIC
It is the only insurer offering sovereign guarantee meaning that the policyholders funds are completely secure
This is the reason that LIC policy premiums are higher than private sector counterparts

An initial public offering (IPO) refers to the process of offering shares of a private* corporation to the public in a new stock issuance
Public share issuance allows a company to raise capital from public investors
LIC’s stake sale is likely to be under 10%

LIC was set up under a special act in 1956
Hence the government will have to amend the law, a process that may delay the sale beyond March 2021
An inter-ministerial committee will be set up to decide on the roadmap and extent of disinvestment
Target is to bring the IPO by second half of FY 2020-21

The govt has targeted an aggressive disinvestment programme
The government has set an ambitious target of ₹2.1 trillion(2.1 lakh crore) for the sale of government holding in state-run companies
It includes ₹90,000 crore to be raised from an IPO in LIC and a stake sale in IDBI Bank
The aggressive stake sale plan comes against the backdrop of declining tax collections and a sharp deceleration in the economy

LIC has been used as an investor of last resort in the past to support the markets by buying shares of state-run companies
It also bought shares of state-owned companies during divestment and when investor participation was weak.($1.4 billion in ONGC IPO)
It was also called in to bail out IDBI Bank, which had been severely hit because of bad loans in 2018.(~10,000 crore)
LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
In FY19, LIC invested around Rs 68,620 crore into the equity market.
It also provides funding for many infrastructure projects – Rs 3,76,097 crore as of March 2018.

LIC owns double-digit stakes in several publicly traded firms, including Bharat Heavy Electricals Ltd. and Larsen & Toubro Ltd., that are collectively worth more than $80 billion.
If LIC shares are listed on stock exchanges, it could easily emerge as the country’s top listed company in terms of market valuation

Saudi Aramco, Saudi Arabia’s state owned oil company brought its IPO in December 019
It raised about $30 billion in the world’s biggest-ever initial public offering
It soon overtook Microsoft Corp. and Apple Inc. as the most valuable listed company

The government is expecting over ₹70,000 crore from the sale of an undisclosed stake in LIC.
Listing of companies on stock exchanges disciplines a company and provides access to financial markets and unlocks its value.
It also gives opportunity for retail investors to participate in the wealth so created.
Unlike unit-linked insurance plan (Ulip) investors, who have a clear visibility on the daily performance of underlying funds, the endowment policyholders’ visibility is limited to annually declared bonuses
Public listing of LIC will lead to more disclosures of investment and loan portfolios and better governance, with greater transparency and accountability.
Listing will allow analysts to monitor LIC’s governance.
LIC will come under Sebi’s direct watch and will have to comply with the requirements meant for other listed firms
Such compliance is likely to strengthen its overall corporate governance, financial and investment discipline
Over time, this will increase its efficiency and it may deliver higher returns to policyholders
Government’s influence on its asset management will reduce