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Sunday, April 11, 2021

Selling LIC to private investors is a stupid idea

Here is why selling LIC to private investors is a stupid idea. The government of India invested 5 crore rupees to create Life Insurance Corporation back in 1956. Can you guess what is it worth today? A rough estimate of its assets sumps up to 31 lakh crore rupees. And every year, LIC churns out around 3-4 lakhs as a surplus. Who on earth would want to sell an asset like that? Apparently, the Government of India Does. 

Finance Minister, in her speech during the 2020 budget time, announced the sale by saying these words: “The government now proposes to sell a part of its holding in LIC by way of an initial public offer (IPO)”. This raises many questions: 

First of all, does the government of India have the authority to sell the LIC? 

Second, even if it has the authority, who will buy such a behemoth given lackluster investment friendly environment we are currently in? 

Third, What happens to the insurers, who not only purchased the policies of insurance but also invested in LIC’s pension schemes. 

Selling LIC to private investors is a stupid idea
Source: Wikipedia | Representational Image

First: do the government have authority to sell any part of LIC? To answer this, we have to go back into history a little bit. The Life insurance Corporation of India was founded on September 1, 1956 when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India. Over 245 insurance companies and provident societies were merged to create the state-owned Life Insurance Corporation of India. When the LIC was set up,  it was not structured as a company. Instead, it is uniquely structured as a corporation in which all profits, barring the 5 per cent dividend paid to the government for its equity, are distributed to policyholders. Think of LIC as a trust, a giant mutual benefit fund if you will. This innovative structure has given it a popular respect, made it earn a household name that is unrivaled since its inception.

Now, consider this: Apart from the initial equity of Rs.5 crore in 1956, the Government of India has never made any investment in LIC. Back in 2008, A bill to increase the paid-up capital of state-run Life Insurance Corporation to Rs 100 crore from its current Rs five crore was made an act. This was done to bring it at par with private insurers. Even these funds were raised internally by LIC. So it is natural  to ask what gives the Government of India now to claim ownership of the corporation, its assets or its reputation? The only involvement of the Government Of India was in the form of a sovereign guarantee which is an intangible one. I mean, I would not mind being a guarantor for such a profit churning machine. During the financial crisis time in 2008, you might have heard the term ‘Too big to fail”, LIC can be described as the exact opposite: it is “Too good to fail”. 

The Securities and Exchange Board which governs the stock market in India, stipulates that if a company has to undergo an IPO, a 10 percent of the shares should be offloaded in the market. Given the government of India owns only 5% of the LIC, where does the rest of the share come from to be sold in the market? Remember, The LIC was set up through the LIC ACT in 1956. So the first step the government has to do before selling the stake is to amend the LIC Act. LIC Act is the act which governs the functioning of LIC. The act mandates that, keeping aside the 5% share of the Government, the rest of 95 per cent of the profits must be distributed in the form of bonuses to policyholders. 

So, lets ask this question again: Do the government have the authority to sell LIC without the policy holder’s approval? 

Now, Let’s look at the second question: Lets say, even if the government has the authority to sell it and proceeds to sell it, who will buy it? 

Lets say, the government amends the LIC act and somehow manages to travel the rocky road to the stock market, The government has to question itself, am I being stupid? 

It won’t do justice to this article if we do not mention the awesome role LIC played as a investor of last resort to save the stock market from collapse. LIC has been by far the biggest investor in the Indian market. It owns significant double digit stakes in including BHEL and L&T, that are collectively worth more than $80 billion dollars. LIC also has investments in government undertakings, such as the Indian Railways. LIC stood steadfast withholding the competition from the private insurance companies. 

Lets say, despite this, if LIC was put on sale, who will buy it? Probably no one, remember we are in a time where the investment in capital goods by the private entities is at record lows. It is extremely unlikely even  a consortium of private investors would have the cash or leverage to buy LIC if or when it goes on sale. The only solution is offer it at a bargain price. Surely that would be a scandal by any standard. Kajal Gandhi, an analyst at ICICI Securities Ltd. in Mumbai. Speaking to LiveMint, said: “Even a 10% dilution will be difficult for the market to absorb it in one go.” So, financially speaking, selling LIC to private investors is a stupid idea.

Now, Let’s look at the last question: Did the government consider what would happen to the insurers who are entitled to the 95% of the dividends? and what about the other stakeholders?

Without even arguing, we can conclude it was an utter responsibility to propose the sale of LIC without mentioning the majority stakeholders. Here are some statistics around the LIC: As of 2019, Life Insurance Corporation of India had a total life fund of 28.3 trillion US dollars. That is almost 8 times more than India’s GDP. The total value of sold policies in the year 2018-19 is 21.4 million US dollars. Life Insurance Corporation of India settled 26 million claims in 2018-19. It has 290 million policyholders.

So naturally, the statements made by the Finance Minister will send a shock wave among its policyholders, spreading anxiety and fear. Questions like : What would happen to the sovereign guarantee that covered existing policies?, How could the government change the terms of the contract midstream?, What would happen to savings despoiled in LIC’s pension schemes? are valid ones. 

Opposing the announcement, On February 4 2020, thousands of LIC employees across the country participated in a one hour lunch hour demonstration at LIC offices. On top of this, there are approximately  12 lakh LIC insurance agents who played a significant role in the build up of LIC assets. If the LIC is to be privatized, what would happen to those agents? Where will they be placed? 

Without putting emphasis on all the important aspects that needs to be considered, the statement made by the Finance Minister is nothing short of an outrageous one. Soon after the announcement, ICICI Prudential Life Insurance Co. stocks saw a dip of 6%-14% respectively. The announcement made policy holders anxious. Remember LIC is a household name of middle class India, who have invested their lifelong savings in insurance and pension products. LIC is a genius in the world of finance—nothing like it exists anywhere in the world, even in the era of globalized finance. Selling LIC to private investors is a stupid idea.

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