With LIC being out for disinvestment via an IPO, this means the institution would become a company that will require needed regulatory changes.
The Union Budget may not have transcended the fiscal clichés that go with such announcements, but the point made on disinvestment of the Life Insurance Corporation of India (LIC) will go down as the big story to track during the year. LIC has been the star of government-owned institutions, and has continuously been the bastion of security and assurance for a myriad of policyholders. In fact, it cannot be denied that when a policy is due for redemption, no other company makes the effort to trace the policyholder as much as LIC does! Such is the reputation of LIC that any talk of any kind of disinvestment makes for a big story.
There are evidently arguments on both sides on whether such a disinvestment is required or not, but that is not really the point here. It may be assumed that this has been worked out by the finance ministry and an informed decision has been taken based on such evaluation. As it has been stated that there will be disinvestment, the storyline that develops would be important.
First, the valuation of the company is crucial. The ministry has said that this would be worked out in due course of time. LIC has as asset base of Rs 36.7 lakh crore, and involves 22 lakh agents and a staff of 2.85 lakh. It has 11,280 branches across the country. The LIC Annual Report for FY19 places the market value of equity at Rs 9 lakh crore, which can give an idea of the very high valuation that can be expected. The important question at the ideological level is the extent of disinvestment this year, which the officials have put at 5-10% of the total capital.
The next is whether this would be a one-shot affair, or if this would be of the crawling variety where the government will lower its stake till 51% and reap the benefits of providing support to future budgets? Logically, it should mean further such measures over the years, or else the motivation would look like as being only garnering revenue and not moving towards a changed business model. This has been the case for several PSUs where buyers have been found even while the government nature of the company remains. Therefore, it is possible that this could also be the case with LIC.
Third, with LIC being out for disinvestment via an IPO, this would mean that the institution would become a company that will require the needed regulatory changes. But the focus would automatically change—once a company is listed, the financial performance will matter and the profitability ratios as well as capital and NPAs will surface for discussion. In fact, the quarterly syndrome of continuously reporting higher earnings will become a goal in itself, and the nature of the business can change gradually in tandem with private ownership share from being a company run for the ‘policyholder’ to one ‘for the shareholder’. Benchmarking with other private firms cannot be eschewed, and there will be greater focus on disclosures and transparency.
Fourth, the amount being spoken of would be very high and could be anywhere in the range of Rs 70,000 crore to Rs 80,000 crore, assuming the balance would be for the other financial institution. The question is, can the market absorb such a large stock of capital? The highest amount raised so far was Rs 3.13 lakh crore in FY18. If Rs 90,000 crore has to come from the market along with a part of the balance Rs 1.15 lakh crore of other disinvestment for this year (a total of Rs 2.1 lakh crore has been budgeted), the demand on the market would be immense. There would also be the issue of FPIs being allowed here, which would add another dimension. FPIs have been quite dormant in the equity segment since 2014-15 when around $18 billion came in (or Rs 1.25 lakh crore). But this rather large amount from one issue will challenge the market for sure, and the timing has to be right to be successful.
Fifth, from the point of view of the government, it will continue to be the owner at this stage with all policyholders having the sovereign guarantee. For interest in the IPO, investors may see what the future plan would be like, especially so in terms of control. This is important because LIC has always played the role of investor of last resort in the disinvestment programmes of the government in the past. Therefore, whenever the government wanted to disinvest in a PSU where there were limiting factors such as timing, valuation, type of sale, etc, LIC was always there to buy the stock and transfer the funds to the government. Once LIC gets listed, this flexibility may not remain as shareholders would question every such investment, especially of PSUs that are not doing well in terms of profitability. The puzzle will unfold when LIC is listed, because even if the government has a majority stake, the market will not take kindly to such investment that become big news. This is something the government has to be prepared for.
Sixth, the timing of this announcement has a bit of irony because the recent Union Budget has brought in a new personal taxation system that will be without any exemptions of certain savings, which include insurance. The peculiar part of insurance is that while life cover is the main goal, it is often taken for two major reasons, besides the contingency of death. The first is to get a steady return periodically as per the policy, which goes with tax benefits even if it is not too attractive. The second is tax benefits under Section 80C. In fact, the latter actually pushes up the effective return on insurance products. With the finance ministry indicating that in due course of time the ‘option’ to join the new income tax scheme will not be there, the new scheme does militate against savings and insurance—both life and non-life can get impacted as people do not get the tax incentive.
Last, given the track record of large disinvestments, the practical question is whether or not this can be accomplished in 2020-21 as there are several processes to be followed before coming out with the issue? Also, given that it would be the first of its kind, there could be opposition from various quarters, leading to delays. Several large disinvestments have gotten held up on account of these factors. As the amount expected from this sale is large, non-accomplishment would mean a significant impact on fiscal balances as these account for about 3% of total receipts that have to be compensated through other measures. Considering that there have been sharp tax shortfalls in the last two years and that the economy is expected to gradually improve and not register a V-shaped recovery this year, the budgetary implications can be serious.
Disinvestment in LIC is a very big story that will lay the template that can be followed for other such great institutions. It does seem as if a blending ideology that caters to the people with market flavour will be the new offer at the disinvestment parlour for sure.