‘Govt lost Rs 50K cr due to undervaluation of LIC shares; biggest scandal in annals of privatization in India’

The government of India will incur a loss of a whooping Rs 50000 crore due to undervaluation of the LIC shares put for sale through Initial Public Offering (IPO), estimated the Peoples’ Commission which comprises of eminent economists, social scientists and activists.

After an analysis, the Peoples’ Commission on Public Sector and Public Services stated that due to pressure by the “investors”, the Modi government undervalued the price of the LIC shares.

Calling the whole process “scandalous”, the Peoples’ Commission, which has ex-JNU professor Prabhat Patnaik as a leading member, had on May 2 urged Finance Minister Nirmala Sitharaman to halt the process. But the government did not pay any heed.

Questioning the methods adopted by the government to decide the value of the shares, the Peoples’ Commission said, “This is nothing short of a scandal, perhaps the biggest in the annals of privatization in India”.

Alleging that the IPO was offered “under pressure” in order to pave the way for privatization of India’s blue-chip PSU, the Commission said, “Finance Ministry has succumbed to the pressure by global investors and offered the shares at a deep discount.”

“Given that retail investors, employees and policyholders are being offered shares at a discount – retail investors and employees get to pay Rs. 904 per share and policy holders Rs. 889 per share – this implies a huge loss to the public exchequer,” reads a statement issued by the Peoples’ Commission.

It alleged that the government has not used the “multiplication factor” which is the standard practice while deciding the value of shares.

“Applying a multiplication factor of even 3.96 (HDFC Life) to the LIC case shows that the base price of each LIC share in the IPO ought to be at least Rs. 3,379. At this price the total earnings from the sale of 22.1375 crore shares would have been Rs. 74,803 crore. The resulting loss to the public exchequer is a whopping Rs. 53,795 crores,” added the Peoples’ Commission.

Asking as to why the government did not rebuff pressure from capricious investors whose interests are contrary to those of millions of policyholders who will be the ultimate losers, the Peoples’ Commission asked, “How is it possible for the valuation of India’s biggest insurance company, sui generis in the world of finance, to vary so much within a matter of a couple of months?”

Talking to National Herald, C Venkatachalam, general secretary, All India Bank Employee Association (AIEBA) said, “The govt sold shares in LIC up to 3.5% now. It may look very small but what is important to note is that it is the beginning of selling the shares in this national flagship institution. It is nothing but selling the family silver and long-term assets to tackle the short term current financial constraints. The govt has no qualm of conscience. They are up to selling anything.”

As on May 9 – the last day of bidding – the state-owned insurance behemoth has subscribed 2.95 times, with offers receiving bids for 29.07 crore equity shares against IPO size of 16.2 crore equity shares.

As per reports, the Modi government intends to raise Rs 21,000 crore by selling 3.5 percent stake entirely through an offer for sale (OFS) of which 10 percent of the shares were reserved for LIC policyholders and 0.7 percent for LIC employees. Also, 31.25 percent was reserved for household (retail) investors.

Established on September 1, 1956 through the Life Insurance of India Act that nationalized the insurance industry in India, LIC was created after the merger of 245 insurance companies and provident societies.

Regarded as one of the strongest financial institutions India ever had, the LIC got only Rs 5 crore as the government investment in the form of equity between 1956-2011.

Highlighting peoples’ contribution in building the LIC, the Peoples’ Commission said, “To reiterate, between 1956 and 2011, the government investment in equity was a paltry Rs. 5 crores, implying that it was the hard-earned savings of policyholders that was instrumental in the LIC blossoming into a mature insurance company.”