Treading perilous Path

In her Union Budget 2021-22 speech on February 1, Finance Minister Nirmala Sitharaman had said the Centre would privatise two more PSBs after it privatised IDBI Bank in 2019 and merged 14 PSBs over the past four years. She also announced that one general insurance company will be privatised and LIC will be disinvested through an initial public offering (IPO) of LIC in 2021-22.

The initial public offering is nothing but the first sale of shares of a company to the public before being listed in the bourses/stock market. A listing refers to the company’s shares being on the list (or board) of stock that are officially traded on a stock exchange. There is a proposal to initially sell a small tranche of the insurance behemoth through an Initial Public Offering (IPO) and later dilute the government’s holdings.

All such contentious steps are resorted to generating resources to bridge the mammoth, mounting fiscal deficit. The government is treading a perilous path has kept the disinvestment target at Rs 1.75 lakh crore in 2021-22. Out of this, Rs 1 lakh crore is to come from selling government stake in public sector banks and financial institutions and Rs 75,000 crore would come as CPSE disinvestment receipt in 2021-22.  The government is also trying to sell many assets which are shrouded as monetization of assets to hoodwink masses.

 In the meantime, the government has submitted the first list of 12 public sector undertakings (PSU) set to be privatised, as announced in the Union Budget 2021-22. The list includes two public sector banks and one general insurance companies. The Centre had last year merged 10 public sector banks into four, bringing down their number from 27 in March 2017 to 12.  However, the decision is yet another evidence of the government’s bankruptcy of ideas to advance the country’s financial health. The disinvestment route to fix the economy has been repeatedly failing.

Being infuriated, exasperated, public sector employees across India are on warpath and protesting against privatisation. Public sector banks’ employees held a 2-day strike on March 15-16 while general insurance companies’ employees made a strike on March 17. LIC employees will go on strike on March 18 against IPO and Foreign Direct Investment (FDI) hike from 49 percent to 74 percent.

Despite wage cut, employees going on strike means there is something grave surreptitious design in the government agenda of aggressive, unfettered disinvestment and privatisation.  According to various leaders of a various trade union, the ideological assault on the public sector to appease crony capitalists, decimation of the public sector that cater to the interest of common people, weakening public sector to help the private sector grow, transferring of public assets to private individuals through privatisation are major areas of concern.  The government has learned nothing from a global crisis 2007-08 which was triggered by the collapse of private companies and India was decoupled because of the existence of a strong public sector.

The Life Insurance Corporation of India (LIC) is deeply rooted in the lives of Indian people. In fact, its logo represents a promise rendered by the corporation to the people of India. It consists of a flame, that indicates life, and the protective hands of insurance. Amendments to the Life Insurance Corporation Act, 1956, including changing the way the state-owned behemoth distributes its surpluses, will be key to the proposed public offer through which the government is looking to divest a part of its stake.  The government has to convert the corporation into a company ahead of the IPO.

  The Amendments to the Life Insurance Act, 1956, which was tabled along with the Finance Bill, also proposes to increase the authorised share capital of the corporation to ₹25,000 crore divided into 2,500 crore shares of ₹10 each.

The other amendments to the Life Insurance Act include the introduction of provisions on corporate governance in line with SEBI norms to enable the listing of LIC on stock exchanges. The Centre will hold at least 75 per cent stake in the state-owned Life Insurance Corporation of India for the next five years and will continue to hold at least 51 per cent in the life insurer after that period.

It is further proposed to substitute section 4 of the LIC Act to provide for the vesting of the general superintendence and direction of the affairs and business of the LIC in its Board of Directors. The amendments further propose to enable issue of shares to the Central Government against paid-up capital invested by it in LIC as well as issue of bonus shares to it, which could be offered for sale by way by IPO, with resultant receipt of money into the Consolidated Fund of India. The government will also likely to continue with its guarantee on LIC policies.

The government has already appointed consultants to guide the public offering. It has also appointed an actuarial firm to determine the embedded value of the Corporation. Milliman, which is among the world’s largest providers of actuarial services, has got the mandate to compute the embedded value (EV) of the LIC, which is a key valuation metric for life insurance companies. Lenders like banks and NBFCs are valued in the stock market as a multiple of their book value (BV). Investment companies like mutual funds are valued as a multiple of their Assets Under Management (AUMs). Similarly, life insurance companies are valued at multiple of their EVs.

  Currently, LIC is exempted from disclosing its EV. In fact, the EV calculation would mean a comprehensive exercise because of its legacy assets. Since LIC is also vastly different from private life insurance companies in terms of ownership structure, product mix, profitability sharing structure, agency model, there is a tough task ahead for the global actuarial firm.

However, according to trade union leaders, the proposal of the government to sell a part of its holding in LIC by way of an initial public offer (IPO),” is vacuous for the simple reason that the government, apart from the initial equity of Rs.5 crore in 1956, has never ever made any investment in LIC to now stake a claim to ownership of the corporation, its assets or its reputation. Even when the Insurance Regulatory Authority of India mandated an increase in equity to Rs.100 crore for insurance companies, the funds were raised internally by LIC.

The only support provided by the government has been intangible, in terms of the government’s sovereign guarantee that backs policies LIC has issued in the last 64 years. A claim on that guarantee has never ever had to be made simply because LIC has been by far the biggest investor in the Indian market.

The argument for disinvestment of the LIC is based on the thinking that the move will augment the corporation’s efficiency is unwarranted. Union Minister of State for Finance Anurag Thakur has mentioned that an initial public offering (IPO) of the life insurer has been planned only to enhance its market share and to attract further investment that will lead to better prospects of the policyholders. But he did not explain how disinvestment will enhance market share and efficiency. When banks were disinvested, similar arguments were made too. But now banks are annihilated through merger or disinvestment or privatisation.

The protagonists of disinvestment argue that divesting LIC would unlock shareholder value, make accounting transparent, raise corporate governance and help the business grow.  It would also emerge as India’s largest company by market capitalisation, overtaking the likes of Reliance Industries and Tata Consultancy Services.  LIC’s huge embedded value would help to spur disinvestment receipts and create an actual level playing field in insurance.

 But surely the LIC couldn’t have grown from a 5-lakh company to one worth 32 lakh crore if it lacked efficiency. Throwing LIC open to private players will destroy its ethos of public service, make them subservient to profit-making motives. The listing of LIC will force this institution to work to enhance the value for shareholders rather than creating value for the policyholders and the national economy.

 A key amendment is also regarding the utilisation of surplus from life insurance business under which it pays 5 per cent of the surplus to the government. Government and shareholders’ share in LIC’s surplus will increase and policy holders’ share may decline in tandem. Therefore, the LIC IPO is a regressive step that would enable a small section to exploit and corner the massive value created by the finest public financial institution in the country.

All those arguments are baseless and bereft of any sound reasoning as LIC’s accounting system is fully transparent, governance is effective and business is growing. The employees and officers’ associations including many economists have vociferously opposed this move as it is tantamount to creeping privatisation.  What is praiseworthy is that when society is sullied, contaminated, corruption is rampant; LIC continues to enjoy the trust of police holder as it is judged as 3rd most trusted brand after Dell, Jeep among 1000 companies in Trust Research Advisory (TRA)’s Brand Trust Report 2019.

LIC is the only Indian companies to feature in the top seven brands. LIC was also adjudged as the country’s most attractive brand in the banking and financial services segment only as per TRA in 2016. Similarly, among 100 companies, LIC is the second most valuable brand after Tata as per the “Brand Finance India 2019” ranking.   LIC is also the biggest investor in the equity market.

It is outlandish that a government that professes to work towards an Atmanirbhar Bharat has decided to increase FDI limits in insurance from 49 per cent to 74 percent and allow management control to foreign capital. there is absolutely no justification for FDI hike in the insurance industry. The actual share of FDI in the total investments in the private insurance industry today is much less than the current limit of 49 percent.

Scarcity of Foreign capital, therefore, has never been an inhibition to the growth of the insurance industry. FDI hike in insurance would only help foreign capital gain greater control over our precious domestic savings and would be against the national interest. Domestic savings play the most vital role in capital formation and its investment in productive sectors of the economy. By hiking FDI limits and allowing control over life insurance companies, the government is putting to risk the savings of the people greatly harming national interests.

 For success in insurance, the most important component is reliability which is reflected through claim settlement.  The LIC has been performing phenomenally. The most important indicators of a life insurance industry are number of people it has insured, its premium income as insurance implies risk protection. In all those indicators, LIC continues to spread its suzerainty. Despite the opening of the insurance sector, LIC is India’s largest insurer, cornering around 68.74 per cent of the market share. The LIC has nearly 40.28 crore policyholders (28.92 crore individuals and 11.36 crores group policyholders) as on March 31, 2020, though it has to take care the persistence/lapse ratio. In 2020-21 L I C has sold 5.32 crore policies.

The corporation collected over Rs3,79,062.56 crore of total premium income in 2019-20  The total income of LIC, which includes total premium and investment income, was around  Rs   615,882.94  up from Rs 560,784 crore in 2018-19, It means, LIC has been able to withstand the competition belying speculation of many that LIC will collapse after the opening of insurance sector. LIC is more efficient compared to where it was in 2000, a manner unseen anywhere in the world.

 The arguments that disinvestment will help LIC becoming India’s largest company by market capitalisation sounds hallow. The rise in market capitalization is just a paper-thin illusion.  Much of this prosperity has proved illusory in the case of many listed companies in the time of crisis. Police holders have nothing to do with market capitalization which is linked with the interest of shareholders.

What are important ingredients for the insurance industry is not market capitalization, but its assets, life fund, surplus or profit generated.  In terms of assets, LIC is the number one company in India with assets worth Rs 31.96 lakh crore. Speaking of the market capitalization of LIC is redundant when it is already number one in assets? Further, the value total life Fund of LIC stands at Rs31.14 lakh crore at end of March 2020.

According to the government’s own admission, the state-owned insurance company -LIC – had generated a surplus of Rs 48,436 crore in 2017-18 and ended up sharing Rs 46,014 crore out of that sum with its policyholders. The rest of the Rs 2,421 crore was paid to the government. In 2018-19, LIC generated a surplus of Rs 53,214.41 crore and paid Rs 2,611 crore as a dividend to the government.  Similarly, a surplus of Rs 53,954 crore was produced by the LIC in 2019-20. The insurer shared Rs 51,257 crore from that with its policyholders whereas the government received the remaining Rs 2,697 crore s dividend. As on March 2019, LIC has invested Rs 21.40 lakh crore in the social sector and government securities, the government-approved securities. LIC also has huge investments in debentures and bonds totalling over Rs 4.34 lakh crore.

Successive governments have used LIC to enhance their divestment programmes and have used LIC as a cash cow and milked it. LIC has been asked by the Modi government to buy other’s share — often ailing public sector companies when they have trouble finding private takers. From 2014 to March 2018 the LIC has spent, at least, Rs 48,000 crore so that government can meet its disinvestment targets.

In the past seven years, LIC has become “the lender of last resort” across sectors. It has subscribed to the power sector’s Ujwal Discom Assurance Yojana (UDAY) bonds and was made to invest in the National Investment and Infrastructure Fund (NIIF). LIC has been investing in Railway massively.

There is talk of a level playing field in insurance by obliterating LIC Act 1956 that provides a sovereign guarantee to police holder’s sum assured, bonus, etc. But when there is profit, level playing is considered, but when the serving nation, no level playing field. Private companies avoid such nation-building works with impunity. The major question is now: when others are failing, LIC coming to their rescue. After disinvestment, it cannot do the same job as in the past.

Divesting LIC means killing the golden goose and treading the perilous path of weakening a public sector that has played important role in nation-building activities. The listing of LIC will force this institution to work to enhance the value for shareholders rather than creating value for the policyholders and the national economy. Therefore, the LIC IPO is a regressive step that would enable a small section to exploit and corner the massive value created by the finest public financial institution in the country. “

According to the former president of AIIEA, Amanullah Khan, the LIC was created to mobilise small savings and convert them into capital for long-term investments to help the industrialization of the country. The LIC was also given the mandate to offer total protection to the policyholders’ monies and ensure decent returns. The LIC has been very successful in carrying forward these objectives by operating on the unique principle of ‘peoples’ money for peoples’ welfare’. The public listing of this eminently successful institution will undermine the very objectives of the nationalisation of life insurance business and the creation of LIC.

DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.