Insurance and market experts believe that listing LIC will mean more transparency and better corporate governance for the company.

What does govt stake sale in LIC mean for its policyholders Experts weigh inImage Credit:
Money LIC Tuesday, February 04, 2020 - 12:16

One of the most significant announcements made by Finance Minister Nirmala Sitharaman while presenting the Union Budget for 2020-21 is the government’s decision to sell a part of its holding in Life Insurance Corporation (LIC) by way of an initial public offering (IPO).

“Listing of companies on stock exchanges discipline a company and provides access to financial markets and unlocks its value. It also gives opportunity for retail investors to participate in the wealth so created,” the FM said in her budget speech.

Life Insurance Corporation of India was established in 1956 under a special Act. It is the largest life insurance firm in the country with over 70% market share and has total assets worth a whopping Rs 31 trillion. The central government currently owns 100% stake in LIC.

Finance Secretary Rajiv Kumar said on Sunday that the government may sell 10% stake and aims to garner Rs 90,000 crore from the listing and through selling its remaining stake in IDBI.

However, this move has been met with mixed reactions across the country. While some investors, market experts have lauded the decision, employee unions, opposition parties have criticised it.

Several market experts believe that listing of LIC will bring in greater governance and unlock more value for the life insurer, which could in turn benefit policyholders.

According to market expert Ajay Bagga, listing a company will lead to its service standards going up. And it bodes well for a market leader and well-run company like LIC.

“It brings more transparency. We have seen that in the case of SBI and other public sector banks. Previously, listed government companies have done quite well. Take IRCTC for example. Plus LIC’s listing will get the government good finances,” he says.

Once listed, LIC will also come under the purview of market regulator SEBI (Securities and Exchange Board of India).

Ashwin Parekh, managing partner, Ashwin Parekh Advisory Services LLP, says that listing LIC will force the government to bring in some order of governance into LIC, especially when it comes to its investment decisions. “The government then cannot use LIC as a bank for acquisitions like IDBI, IL&FS, etc. It will stop adverse investment decisions because once listed, SEBI and IRDA will have to be convinced.”

Moreover, with the government selling only around 10% stake, the ownership will continue to remain with the government. The government has also assured policyholders that they will not lose their sovereign guarantee.

Sovereign guarantee means that the sum assured in your policy, including bonuses, shall be guaranteed by the government. This means it’s a surety or an undertaking from the government that it will pay you the assured sum (including bonus) on your policy.

Market observers are also of the opinion that listing LIC will give it more marketing muscle and make it competitive, which will mean that private players will now have to invest more and bring out more innovative products.

More innovation in the market with better products will only further benefit policyholders, they say.

However, LIC employee unions say that listing LIC will adversely affect policyholders. They believe that for a company performing so well, there is no need for disinvestment, just because the government needs money.

S Rajkumar, General Secretary, Federation of LIC Class-I Officers' Association, says that once LIC is listed, there will be more ‘owners’ of the company in the form of shareholders, which will mean that a portion of profits will have to go to them as well. This, Rajkumar says, will reduce the bonuses that policyholders currently receive.

“This is people’s money that we have collected. Owner of the money in LIC is not the government, it’s policyholders. Even when we part with profit, we give only 5% to the government, rest we give to policyholders as a bonus. So how can the government take away the right of policyholders?” Rajkumar questions.

Monetising a national asset

Ajay Bagga says that listing LIC will not only bring in good finances for the government, it will also provide LIC a monetisation of all the good work that its been doing.

“A listing will give LIC more marketing muscle and give it more limelight even. We can even get some strategic international investors like sovereign wealth funds from friendly countries, who would be very keen to own a small stake in a company like LIC. It’s a national asset, we should monetise it and create value. It will also enable LIC to find a better pricing than going through the market and you will get long term funding. Nobody's saying that the government should 100% sell off LIC. It’s just listing for better price discovery,” Bagga says.

However, Rajkumar from the employees’ union says that LIC has huge assets, worth over Rs 31 lakh crore, which are undervalued. “If you put a conservative value on the assets and put a price on the share, this hidden wealth will be transferred to corporations and rich individuals. This means the money we collected from individuals for 60 years will be looted by the rich,” he claims.

It’s not just the employee unions, political parties too are opposed to the disinvestment.

Former Finance Minister P Chidambaram said that it is wrong to assume that every public sector firm must go through disinvestment, partial or whole. The stake sale in LIC, according to him, is highly debatable. The Congress has reportedly decided to have an internal debate on firming up the party’s stand on the budget announcement of LIC disinvestment.

The Karnataka unit of the opposition Congress too slammed the proposal to sell equity stake in LIC.

"Another blunder of the (NDA) government is the announcement of selling stake in LIC. This is again a bid to privatise LIC and open it to private parties, putting people's deposits in danger. The government is hell bent on selling the country to their capitalist friends from railways to LIC India," the party said in a tweet.

“I am shocked & appalled to see how the central government plans to ambush the heritage & legacy of public institutions. It’s the end of a sense of security. Is it also the end of an era? #LIC #IndianRailways #AirIndia #BSNL," West Bengal Chief Minister Mamata Banerjee said in a tweet.

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