Going by the experience of listed PSUs, this is not a given
With the government deciding to sell a part of LIC after listing it, the fond hope in many circles is that this will usher in a new culture of transparency and non-interference. Once LIC is listed, a process that can take around a year, the argument is that both investors as well as analysts will watch it closely and any adverse action by the government will make its stock crash; since the government will own 90-95% of LIC’s stock, this will adversely affect its wealth, so this will act as a restraint. In such a situation, to use a recent example, the government will not force LIC to take over an IDBI Bank. Nor will it force LIC to offer the largely under-priced Jeevan Jyoti life insurance to around six crore persons at an annual premium of Rs 330 and with a life cover of Rs 2 lakh. With 5.9 crore people buying the cover in FY19 and 1.5 lakh claims, the claims ratio was 1.38—that is, LIC’s claims were 38% more than the premium it received—and it rose to 1.53 by mid-January this year. As more people enroll to this very low-priced insurance, the losses will continue to skyrocket.
Those who believe listing will stop the government from getting LIC to fulfill its social or budgetary obligations—LIC helped salvage many disinvestments by buying shares of unattractive PSUs—must keep in mind this has not happened in other PSUs that are listed. When Coal India Limited (CIL) was listed, one of the investors—the Children’s Initiative—went to court protesting against the government directive to CIL to lower prices of coal; indeed, CIL even admitted in its red herring prospectus that its coal prices were lower than the market price. And even when there was no synergy, the government forced the listed ONGC to buy HPCL from it; till some time back, oil PSUs like HPCL that are listed were simply told how much of the petrol/diesel price they would have to absorb instead of passing it on to the consumers.
What makes this a lot more worrying is that, as the latest LIC annual report points out, its gross NPAs have been spiralling, from 3.3% in FY15 to 6.2% in FY19, and this may not include loans to NBFCs like DHFL or even IL&FS. It is true LIC’s net NPAs in FY19 were just 0.27% thanks to high provisioning, but the NPAs/provisioning are cutting into the returns LIC gives to those insured by it; to the extent the NBFC loans haven’t been fully provided for, LIC’s bottom-line will take a hit. The amounts may not be large enough to impact LIC’s ability to service its insurance obligations right now, but if the government is to keep forcing it to make certain investments—it entered into an MoU to lend Rs 1.5 lakh crore to the Railways a few years ago—or to offer unfunded insurance products, it could well run into financial difficulties. In the year or so that it takes to complete the listing formalities, the government needs to end these practices—and also ensure NPAs are classified and provided for early—as the savings of crores of individuals are invested in various LIC policies.