Govt plan to sell stake in LIC keeps its 33 crore policyholders on tenterhooks

Finance Minister Nirmala Sitharaman, while presenting the Budget on the floor of Parliament on February 1, stunned everyone by announcing that the government would sell its stake in LIC through IPO, which is going to be the biggest in the country’s IPO history.

It has sparked a hot debate across the financial sectors of the country, if it was the right decision which has been taken by the government. For its IPO, the LIC Act has to be amended in Parliament which clearly states that LIC can’t be disinvested in any case.

First of all, the market condition is not well and the country’s economy is passing through an economic slowdown.

Secondly, the government has increased its disinvestment target for the next fiscal to Rs 2.10 trillion and LIC and IDBI Bank, in which LIC is a majority shareholder, alone likely to fetch Rs 90,000 crore. It seems to be an ambitious target, keeping in view the tepid response the government has received under the segment in the current financial year so far.

An estimate says that the government has been able to achieve merely Rs 18,000 crore so far through its ongoing disinvestment programme as against the full fiscal year’s target of Rs 1 trillion.

Replying to media queries, union Minister of State for Finance, Anurag Thakur has said that the government will protect the interests of policyholders of LIC, which is likely to go public in the second half of the next financial year. Listing of LIC will help bring in greater transparency, public participation and also deepen the equity market, he has said.

According to Thakur, the LIC listing, through which the government is likely to shed 10 per cent of its stake in the Corporation, will be in the interest of LIC and its policyholders and that the interest of LIC and policyholders will be safeguarded.

However, the experience of other state-run insurance companies, which have already gone under the hammer in the past, is not good.

Take the example of New India Assurance and GIC Re, which were partially listed at the stock exchange a few years back. The share prices of both the companies have not been able to appreciate at a required level when compared to the stock prices of some of the private sector players like HDFC Life, SBI Life and ICICI Prudential Life Insurance. The reason may be the lack of confidence among the retail investors in the stock market.

Here lies the catch. LIC has got 33 crore odd policyholders and it enjoys the position of market leader in the life insurance space which is crowded by 24 players. Listing may not go well with its retail policyholders, keeping in view the choppy path the market is currently passing by, believe experts.

Not to mention that LIC is losing the market share due to the wrong policies adopted by the government.

In spite of the fact that its benefit health insurance policies like cancer cover has been a dampener, it has backed out from a group of life insurers who have started lobbying before the sectoral regulator, Insurance Regulatory and Development Authority of India (IRDAI) in their bid to re-enter indemnity health insurance segment. It was until 2016 when the regulator asked the life insurers stop selling indemnity health insurance products after the arrival of specialised health insurers in the industry. However, the product has been doing very well and has been responsible to drive the industry’s growth since then due to increase in awareness among the masses.

However, LIC feels that it is already busy with a host of products and hence it was not interested to re-enter indemnity health insurance. It was confirmed by the senior most managing director of LIC, T.C. Susheel Kumar sometime back.

So, the moot question which arises is that giving a damn to the industry’s demand to re-enter the indemnity health insurance segment, LIC will have to be now busy with the listing process, which may further divert its attention from policyholders in some way or the other, feel experts.

The LIC's gross NPAs currently stands at 6.10 per cent for the first six months (April-September) of 2019-20. In fact, this puts the life insurance behemoth in the lines of high NPA infested banks like YES Bank, Axis Bank and ICICI Bank. The private sector lenders, once known for best asset quality, saw rising NPAs due to challenging operating environment. In the second quarter of 2019-20, YES Bank ended with gross NPAs of 7.39 per cent, ICICI Bank with 6.37 per cent and Axis Bank with 5.03 per cent, says a media report.

The LIC, with total assets of over Rs 36 lakh crore has its own share of woes trusting the private sector.

LIC has reported total gross NPAs of around Rs 30,000 crore as on September 30, 2019. The gross NPAs at 6.10 per cent in September 2019 have almost doubled over the last five years. The LIC always maintained a stable 1.5-2 per cent gross NPAs, it adds.

Some of the big defaulters include Deccan Chronicle, Essar Shipping, Gammon, IL&FS, Bhushan Power, Videocon Industries, Alok Industries, Amtrak Auto, ABG Shipyard, Unitech, GVK Power and GTL etc.

All India LIC Employees Federation has strongly opposed the government’s move to sell part of its holding in Life Insurance Corporation of India through an initial public offering.

“It is an act of desperation at a time when the economy is in mess. The quiet crisis, which has been mounting for some time, is visible and could soon be audible,” says Rajesh Kumar, general secretary, All India LIC Employees’ Federation, which is among the largest employee unions of the Corporation.

How long can the government continue to sell its national assets (Public Sector Companies) to meet its revenue need, he asks.

Commenting on the government’s assurance of continue to give sovereign guarantee on every LIC policyholder, he says that International Monetary Fund (IMF) in April 2018 had asked the Indian government to remove the explicit sovereign guarantee on every LIC policy and convert LIC into company and the government seems to have simply complied with the diktat of IMF risking the interest of millions of policyholders.

The story of woes relating to LIC’s listing doesn’t end here. The LIC IPO faces a number of hurdles, from timing to its sheer size. While everything depends on the government’s execution, investors don’t have the appetite for such a big issuance at the moment, said Deven Choksey, who oversees investment and research at KR Choksey, a Mumbai-based wealth manager. Assuming that the government raises 400 billion rupees, that will represent a 5% dilution, he added.

Facts and figures:

--On a capital base of Rs 5 crore, LIC’s valuation surplus was Rs 53211.91 crore, Life Fund being Rs 2828320.12 crore and asset under management being over Rs 3111847.28crore at the end of FY2019. Being one of the biggest financial institutions of India any move to privatise LIC

--Prime Minister Narendra Modi’s government surprised investors on Saturday by saying it will sell part of its stake in state-run behemoth Life Insurance Corp. of India to meet its record asset-sale target. The jumbo sale could fetch the government between 850 billion rupees ($11.9 billion) and 900 billion rupees if it gets done this year, Credit Suisse Group AG analysts led by Neelkanth Mishra wrote in a note.

--Sameer Kalra, a strategist at Target Investing, estimates the IPO to be valued between 910 billion rupees and 1.01 trillion rupees, given an average 12-month forward price-to-earnings ratio of 30 to 35 times. “That is the range in which all the life insurance companies got listed," he said.

An IPO of that size would be the biggest the country has ever seen and could create India’s most-valuable company by market value. The nation’s largest deal to date was Coal India Ltd.’s $3.4 billion float a decade ago, data compiled by Bloomberg show.