The Life Insurance Corporation of India (LIC) is the backbone of the Indian economy. Just as Lord Sri Krishna, holding the Govardhana Hill, saved the entire Gokulam, the LIC holds the umbrella to protect the Indian economy from any onslaught, whatsoever.
This is not a euphemism but the stark reality. In such a situation, what are the reasons the government feels it needs an IPO by the premier insurer? In the words of the Finance Minister: to give access to capital, unlock the embedded value of LIC, provide retail investors with a pie in the profit of LIC and bring additional discipline in the organisation. Let’s delve deeper into these areas.
The question is whether the LIC requires capital. With an average of ₹5-₹6 lakh crore of total annual income, the insurer is capable of meeting the needs of successive governments by funding almost a fourth of the Centre’s annual Budget outlay.
Whether it comes to providing ₹1.50 lakh crore for the Indian Railways; ₹1.25 lakh crore to Bharatmala road and highways project; bailing out private and public sector financial institutions such as UTI, GTB and Yes Bank; or boosting stock markets whenever there is a bear run — LIC has always played the sheet anchor role when it had to step up.
Hence, a stake sale may not help LIC any, but it would certainly help the market..
LIC’s assets are valued at ₹32 lakh crore. But this is only the book value. The market value is simply unimaginable.
Even before an actuarial valuation is done to arrive at the embedded value of LIC, statements attributed to government officials are being circulated that about 10-25% of stake will be opened to market, the total value of which will be about ₹8-₹10 lakh crore.
If history is anything to go by, there have been instances of gross undervaluation of PSU assets that have been listed on the stock exchanges. Ultimately, mostly private institutional investors, both domestic and foreign, have gained from such listing.
Pie for retail
In a country where less than 2% of the population access the stock markets, unlocking the value of a mammoth financial organisation just to satiate the needs of a trivial retail investor section is an unnecessary exercise.
But, in the process, the stake fully enjoyed by India’s 130-crore population in general, and 40-crore policyholders, in particular, in LIC, will shrink. The idea of a simultaneous listing of LIC on foreign stock exchanges is also doing the rounds.
Discipline via listing?
Another question that arises is — is the LIC in need of discipline? LIC is an organisation that is almost perennially adjudged the most trusted brand; has won many an international and national award for its excellence in corporate governance; has received the Golden Peacock Award for years together and has obtained ‘A’ grade in the transparency audit conducted by the CIC.
Efficiency of LIC
With 99.7%payments against claims, LIC has the most envious claim-settlement record in the entire world. It had generated a surplus of ₹53,955 crore for 2019-20 of which ₹2,698 crore would be paid as dividend to the Centre. Management expenses were reduced by 3.19% for 2018-19 to ₹29,182 crore from ₹30,142 crore for 2017-18 as per the IRDAI annual report.
For the same period, private companies increased their expenses by 17.51%, from ₹18,677 crore for 2017-18 to ₹21,948 crore for 2018-19.
If we go by population figures, LIC’s 40-crore policyholders could well make it comparable to the third-largest country in the world.
As per the LIC Act 1956 (which needs to be amended before listing), the insurer is more like a ‘mutual benefit insurance company.’ Once listed, it has to dance to the tunes of a trivial percentage of stakeholders, dumping its avowed objective of ‘peoples’ money for peoples’ welfare.’
Insurance is in essence a belief, because only a promise is sold. Only the government and the public sector are capable of fulfilling such a promise. We witnessed the fall of Lloyds of London and AIG of the U.S.— two of the biggest insurance companies — during the 2008 crisis and respective governments had to bail them out. We must derive lessons from those events. And, the COVID-19 pandemic has showcased the importance of government control and the reach of the public sector in serving the public.
Whichever organisational aspect we evaluate, LIC is bound to shine. Handing over such a gigantic organisation just to attain the avowed target of ₹2.10 lakh crore via disinvestment — which amount the LIC is capable of garnering in less than a year, if left undisturbed — is akin to cutting the branch of the tree while sitting on it. This step will prove to be a sure disaster both for the public and for the government, if left unopposed.
(The writer is Associate Member of the Insurance Institute of India)