Disinvestment in LIC: Explained

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There is a separate department under the Ministry of Finance known as the “Department of Investment and Public Asset Management” which takes care of all disinvestment and privatisation related works of the government. Since late 1990’s, disinvestment has become an important feature of the union budget to raise finances from stakes in public sector enterprises.

This year too, the Finance Minister Nirmala Sitharaman has announced the disinvestment in Life Insurance Corporation of India (LIC). The identification of LIC as candidate for public listing by the government was first reported by the Indian Express in July 2019. The government owns 100 percent of it and has planned to sell part of it through Initial Public Offering (IPO). In Budget of 2019, the government has planned to make minimum 35 percent of shares public of the listed companies.

Disinvestment and its method

Disinvestment or Divestment means sale or liquidation of assets by the government, be it of public sector enterprises or other fixed assets, of the government. The government may sell whenever it wants; whole of its enterprises or parts of it. If the government sells whole of it to the private sectors, it can no longer control it and this is called “privatisation”. But the government usually avoids it and sells only part of it keeping majority stake so it can still access control.

In order to achieve its aims and objectives the government follows different methods of disinvestment. These include Public Offer, Sale of Equity, Offer for Sale, Cross Holding, Golden Share, Warehousing and Strategic Sale. The government has proposed to disinvest in LIC by IPO i.e Initial Public Offering. But before disinvesting in LIC, the government has to amend its LIC Act. LIC is supervised by the IRDAI (Insurance Regulatory Development Authority of India) but is governed by LIC Act, 1956 which enables the state-owned insurer to obtain a special dispensation in higher stakes in companies beyond the limit set by the IRDAI.

What is an IPO?

IPO (Initial Public Offering) is a way used by the companies/government to raise funds from public investors through issuance of public share ownership. It is a process of offering shares of a private corporation to public in a new stock issuance. As the transition happens, the existing private sharers become worth the public trading price. They may retain their shares or sell, whole or part of it, for profits. Meanwhile the company provides opportunities to public market investors to invest in the company shares. Public includes any individual or institutional investor who is interested in buying the shares.

The number and price of the shares the company sells determine the equity value for the new shareholders. Shareholders’ equity represents the shares owned by the investors (when it is private or public) but with an IPO, the shareholders’ equity increases with cash from primary issuance. Besides seeing IPO as an exit strategy for the company’s founders and early investors, realizing the full profit from their private investments, it increases the transparency and hence exposure and prestige of the company, opening it for more gains.

Stated purpose of disinvestment in LIC

The government had already listed the shares of General Insurance Corporation and New India Assurance through IPOs three years ago. Public listing of LIC will lead to more disclosures of investment and loan portfolios and better governance with greater transparency and accountability. The government has made the move with an aim to look at stake sales in government entities to raise its finances and to allow these public sector units (PSU’s) to raise their finances.

Though LIC makes huge profit but with its declining market share in the domestic market, the company’s performance has become a concern for its new management. Its market share declined to 66.74 per cent in 2018-19. According to the performance analysis by LIC’s top management, the corporation, except in pension and group scheme (P&GS), has missed its own targets in most of the parameters during financial year 2018-19.

Pros and cons of disinvestment in LIC

With this transition of LIC, and increased accountability, it will be in far better position to manage its balance sheets and function without the need of government assistance or bailout. Such public holdings like LIC play an important role in easing government finances by diluting equity and providing it with access to public debt markets to raise funds. After IPO, LIC may see incremental dilution through direct share sale which may benefit the PSU. The government will benefit both from making the organization self-sustaining and disinvestment as this would add value to the left government holdings.

Today, the LIC customers have almost no access to the information of how the policies and investments are administered. Going public will increase the accountability and credibility. The debut of the firm will be ideal for passive investors or those foreign investors looking at Indian allocations.

But still there are some issues that need to be tackled before the proper implementation of this plan. The issue of issuance of guarantee of about 300 million users of LIC policies will be the first problem to be dealt with. The process of settling the terms for the IPO will take about 4-5 months and even when done, the sale can only be done after waiting for right market conditions.

The plan would take about a year to materialise as there are a lot of legal hurdles. The government will moreover have to negotiate with the employees of LIC who are already opposing the divestment. The announcement of doing away with all kind of exemptions in future may cause loss to the company.

Public reaction

The government has proposed this plan in lines with ‘maximum governance, minimum government’ and the “government has no business to be in business” mantras and to raise funds. But there are various other views by the opposition parties. LIC is where the ordinary people have invested their hard-earned money, which will face an uncertain future once LIC has fallen into the hands of private players,” said BSP MP Danish Ali. Congress is also against this step of the government. The employees are against the disinvestment and say that this is against the national interest. It will endanger the economic sovereignty of the people and will put the savings of crores of policyholders at stake.

There has been no immediate public reaction but there has been a debate by both the sides for the public where the opposition believes that this is against the public and expresses it as “family jewel being sold”. On the other hand, the government says that this decision is taken keeping the interest of public in mind. This step will ensure transparency and will increase the public participation.

Conclusion

The government has taken a bold step by including LIC in the public listing disinvestment list of the budget. Though the Government says it will cause no problem, the employees of LIC have already gone on strike against this step. There are both pros and cons to the plan but the plan can be materialised only after tackling the opposite reactions to it as well as the legal hurdles. If done well, the LIC disinvestment can easily fix several years of budget deficit while providing a significant jump in valuation for each incremental disinvestment..

Author: Ridhima from Rajiv Gandhi National University Of Law, Punjab.

Editor: Ismat Hena from Faculty of Law, Jamia Millia Islamia.

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