For many of us, the Life Insurance Corporation (LIC) brings back nostalgic memories of an all familiar jingle and insurance schemes whose names we could never understand or pronounce.
But aside from the jingle and the tongue twister LIC for decades has proudly stood as the insurer behind every Indian. The insurance giant boasts of assets worth 440 Billion dollars and annual revenue exceeding 4 Billion dollars. Thus, it did indeed come as a surprise during the Finance Minister’s budget speech when she announced that the government plans to sell a part of LIC to private investors. The news has been met with mixed reactions. There is one section which has applauded the government’s move and another which has sharply criticized it. However, while the Modi government ponders over their next move regarding the disinvestment, it would be worth looking at some of the important aspects of this move. In this article we shall examine the impact of LIC’s disinvestment, the legal obstacles surrounding it and weigh in on the arguments from both camps “ the for” and “the against”. Why is the government disinvesting from LIC
Observing the practice of government disinvestment, we have built a notion that it is reserved for those government entities which have been underperforming and are running into losses. For the government, disinvestment is one of the routes to raise finance. By selling its stake or a part of it to public investors the government is able to raise additional finances, share risk or altogether exit a sector where they have been making losses year after year. In LIC’s case there are two main motives behind the government’s decision to disinvest. a) The economic impact b) Greater transparency and more efficient insurance market
Speaking in monetary terms the disinvestment would yield good returns for the government. With assets worth 440 Billion and earnings worth 4.2 Billion dollars annually LIC indeed would be an attractive investment for investors and is bound to be valued at a good price in the stock market. The inflow of additional cash can help the government invest in important infrastructure and development projects and further it can increase its spending on social welfare schemes. India’s insurance sector which was nationalized in 1956 with the incorporation of LIC has seen for decades LIC being the only insurer in the country. It is estimated that 70% of all the insurance premiums paid in the country are towards LIC. Thus disinvesting even a part of this insurance behemoth would ensure good returns for the government. In the Budget for FY 2020-21 a disinvestment target of Rupees 2.1 Trillion has been set by the government out of which 90,000 crores is expected from the disinvestment of LIC and IDBI. For the government, this cash inflow is necessary to stimulate a slowing down economy which has been hit hard by the COVID 19 pandemic.
Greater transparency and more efficient insurance market
One criticism that LIC has often come under is the lack of transparency surrounding its operations. In the past, LIC has been the government’s first option to rescue the distressed Public sector undertaking (PSU's). A particularly controversial move has been LIC’s acquisition of IDBI bank which was completed in January 2019. Most experts agreed that this was a poor decision as being a bank, IDBI should have been acquired by another public sector bank such as SBI rather than an insurance company. Moreover, the acquisition strained LIC’s finances. Apart from IDBI, LIC has also been persuaded to acquire or invest in other PSU’s. It is estimated LIC’s investment is some prominent underperforming PSU’s such as Hindustan Aeronautics Limited (HAL), National thermal power corporation, the new Indian assurance company, and General insurance corporation (GIC) has cost LIC losses worth almost 20,000 crores. The table below shows LIC’s investment and losses with respect to its major Investments and acquisitions,
From the above table, it is evident that LIC's acquisitions have not yielded any viable financial result for the company and has resulted in heavy losses for it. LIC has made these investments at the behest of the Central government. Thus the proponents of disinvestment argue that withdrawal of government participation will further go on to ensure that the LIC does not have to "pick up the slack" for failing PSU's. Further, it has also been suggested that the disinvestment of LIC shall bring it under the purview of the insurance regulator the Insurance regulatory development authority of India (IRDAI). Presently the operations of the LIC are governed by a statutory act (LIC ct,1956) passed by the Parliament, thus the LIC is not presently under the scrutiny of the IRDAI. However, by bringing private investors into the ambit it has been suggested that LIC shall finally come under IRDAI supervision and level the playing field.
Obstacles and uncertainty regarding LIC disinvestment The proposal to disinvest from LIC has not gone down well with some sections especially LIC employees and some policyholders. Just a few weeks after the disinvestment was proposed the employees of LIC staged a "lunch hour" protest against the move. Furthermore, several policyholders have also been very uncertain about what this move will mean for them. The primary concern for policyholders stems from the sovereign guarantee that backs LIC policy. Section 37 of the LIC act states that “the sums assured by all policies issued by the Corporation including any bonuses declared in respect thereof and, subject to the provisions contained in section 14 the amounts assured by all policies issued by an insurer the liabilities under which have vested in the Corporation under this Act, and all bonuses declared in respect thereof, whether before or after the appointed, a day shall be guaranteed as to payment in cash by the Central Government" A sovereign guarantee essentially implies that the central government backs all policies issued by the LIC and shall assure the payment for the same in cash. This what has made LIC policies popular over the years, security, and guarantee that is provided by the central government. While the government has assured that sovereign guarantee shall be retained they are still very much unsure as to what the future hold for them in a partially privatized LIC Another contention concerning LIC disinvestment is that the "government does not own LIC". It has been contended that at the initiation of LIC the government only contributed Rs 5 Crores to the initial capital and in exchange has been picking up 5% of the total dividends. Thus the government at the most owns only 5% of LIC. However, this contention is disputed by the fact that the central government is largely responsible for the operations of LIC section 21 of the LIC act mandates that the corporation shall be guided by the directions of the central government. It has also been widely speculated that before floating LIC for the IPO, LIC would have to be converted into a Government company Some experts have however suggested that this is not necessary as all the government would have to do is simply amend section 5(1) of the LIC act. Section 5(1) of the LIC act reads that; “The original capital of the Corporation shall be five crores of rupees provided by the Central Government after due appropriation made by Parliament by law for the purpose, and the terms and conditions relating to the provision of such capital shall be such as may be determined by the Central Government.” Thus by amending the section capital infusion can be from the central government as well as private investors. Conclusion
Due to the COVID 19 pandemic, the IPO has been delayed. However, the success of the IPO and its impact on the millions of policyholders in the country can only be determined after the IPO has taken place. For policyholders and employees, various legal routes are available to challenge the legitimacy of the IPO however none of them so far have been used. In the end, the LIC IPO episode undoubtedly is exciting even and we should wait patiently and see what it holds for us.