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Context

India’s biggest public issue, the Life Insurance Company initial public offering opened to primary markets on Wednesday.
The government has fixed the LIC IPO price band at Rs 902 to Rs 949 per equity share, announcing Rs 60 discount to the policyholders and Rs 45 discount to LIC employees.
The total value of LIC IPO is set at Rs 21,000 crore, making it India’s biggest public issue to date.

Life Insurance Corporation of India (LIC): A Backgrounder

LIC is an Indian state-owned insurance group and investment corporation owned by the Government of India.
It was founded in 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 LIC.

Beginning of Life Insurance in India

The Oriental Life Insurance Company, the first company in India offering life insurance coverage, was established in Kolkata in 1818.
Its primary target market was the Europeans based in India, and it charged Indians heftier premiums.
Surendranath Tagore had founded Hindusthan Insurance Society, which later became Life Insurance Corporation.
The Bombay Mutual Life Assurance Society, formed in 1870, was the first native insurance provider.

Nationalization in 1956

In 1955, parliamentarian Feroze Gandhi raised the matter of insurance fraud by owners of private insurance agencies.
The Parliament passed the Life Insurance of India Act on 19 June 1956 creating the LIC which started operating in September of that year.
It consolidated the business of 245 private life insurers and other entities offering life insurance services; this consisted of 154 life insurance companies, 16 foreign companies and 75 provident companies.
The nationalization of the life insurance business in India was a result of the Industrial Policy Resolution of 1956, which had created a policy framework for extending state control over at least 17 sectors of the economy, including life insurance.

Present capital base of LIC

LIC is India’s largest financial institution, and if LIC shares are listed on stock exchanges, it could easily emerge as the country’s top listed company in terms of market valuation, overtaking current leaders Reliance and TCS.

The corporation, which started its business with around 300 offices, 5.7 million policies and a corpus of INR 45.9 crores (US$92 million as per the 1959 exchange rate of roughly ₹5 for US$1), had grown to 25,000 servicing around 350 million policies and a corpus of over ₹800,000 crore by the end of the 20th century.

From its creation, LIC, which commanded a monopoly of soliciting and selling life insurance in India, created huge surpluses and by 2006 was contributing around 7% of India’s GDP.
As of 2019, LIC had toa tal life fund of ₹28.3 trillion.
The total value of sold policies in the year 2018-19 is ₹21.4 million.
LIC settled 26 million claims in 2018-19. It has 290 million policyholders.

LIC: A milch cow for the government

India’s top insurer: Governments have long shied away from considering listing India’s top insurer.
Participation in Capital Market: It has played a role in supporting the markets by buying shares during major sell-offs and also shares of state-owned companies during divestment and when investor participation has been weak.
Heavy investments in G-Secs: It is also the largest investor in government securities and stock markets every year.
Infrastructure funding: LIC also has huge investments in debentures and bonds besides providing funding for many infrastructure projects according to its Annual Report for 2017-18.

What is an IPO?

IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.
Offering an IPO is a money-making exercise. Every company needs money, it may be to expand, to improve their business, to better the infrastructure, to repay loans, etc.
A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares.
Through the IPO, the company gets its name listed on the stock exchange.

Initial Public Offerings (IPO) of LIC :

A big-bang announcement

The government could start by initially selling a small tranche of the government-controlled institution through an IPO, and subsequently dilute the government’s holdings.
The IPO is likely to fetch a huge premium as LIC currently has a small equity base.
In the Budget of July 2019, the government had announced a proposal to make minimum public holding of 35 per cent for listed companies.
The government had 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.

How will the IPO go?

The government will have to amend the LIC Act first before taking the Corporation public.
LIC is currently under the supervisory oversight of the Insurance Regulatory Development Authority of India (IRDAI), but it is governed by The LIC Act of 1956,
The act enables it to obtain a special dispensation in several areas including higher stakes in companies beyond the limit set by the IRDAI.
Under Section 37 of The LIC Act, the government has guaranteed the sum assured with bonus in all LIC policies to ensure the availability of financial security to the family of the deceased.

Implications of LIC IPO

It seems like the government is trying to make the most of the brand value of LIC, given that it is one of the few remaining profit-making entities owned by the state.
Will the listing of LIC, which is the country’s largest financial institution with assets under management of close to ₹30 trillion, do any good to its policyholders?

Let’s have a look:

(1) Listing will boost LIC’s efficiency and thereby policy returns

As a 100% government-owned entity, LIC’s financial health is largely outside the scrutiny of the financial markets.
Unlike unit-linked insurance plan investors, who have a clear visibility on the daily performance of underlying funds, the endowment policyholders’ visibility is limited to annually declared bonuses.
Listing will allow analysts to monitor LIC’s governance. LIC will come under Sebi’s direct watch and will have to comply with the requirements meant for other listed firms.
Such compliance is likely to strengthen its overall corporate governance, financial and investment discipline.
Over time, this will increase its efficiency and it may deliver higher returns to policyholders.

(2) Peers will be under pressure to improve pricing and features

Any company going public is good news for stakeholders since it ensures higher transparency, better governance, more disclosures and scrutiny from the investors.
However, LIC is not a typical company. LIC has in the past invested in the equity markets to stem its fall.
After being listed, LIC will be answerable to public shareholders and, hence, will be a prudent investment decision, which is good for policyholders.
LIC will also become more competitive. This will put pressure on its peers to innovate, benefitting policyholders in terms of pricing, product features and services.

(3) Less govt interference will be a positive for LIC’s financial health

For LIC, it will be a significant task to enhance the quality of asset management given that the government sometimes is reliant on it to bail out PSUs, without delving deep into the fiscal prudence of these assets.
Being under scrutiny, the quality of asset management by LIC will be enhanced as the government’s influence on its asset management will reduce.
Further, LIC services a few state-sponsored schemes which have underwriting challenges on the commercial front.
In a nutshell, with less federal interference, LIC will be more accountable with strong governance protocols, which will be a positive for its financial health.

(4) If the sovereign guarantee continues, policyholders won’t perceive risk

So far, LIC has operated almost like a mutual insurance company by passing on most of the earnings to the policyholders and keeping very little as profits, despite having a massive operation.
The listing of LIC is a positive move which will result in transparency of the corporation in public view, sparking renewed interest in the insurance industry in international markets.
Government-owned General Insurance Co. of India is already listed, so the process and transparency will not be any different.
As long as sovereign guarantee over the maturity proceeds and sum assured continue, policyholders won’t perceive any risk.
The return on policies may have to be moderated to boost profitability and technical reserves in the face of shareholder and analyst scrutiny.
It is not clear how much of the company will be diluted. So, the opportunity for the general public to pick up equity in LIC in the IPO may be limited.

Challenges posed by this IPO

(1) Structural challenges

LIC can even evolve into a bank like many of its global peers like Axa, Berkshire, and Munich Re.
But even after the listing, the LIC stock will still be controlled by the Indian government.
And, it will continue to exercise some amount of control.
So, investors in LIC might face what those of PSU banks do – be a part of poor governance, bad decisions — despite controlling 70% of the country’s banking system.

(2) Market hurdles

LIC’s own issues are not the only challenge the company would face in going public. It also remains to be seen if the Indian share market is ready to absorb such a large public issue.
Whilst it will definitely help deepen the markets, given that SEBI regulations need a minimum dilution of 10 per cent to the public, it is unclear if there is enough liquidity for such a large sized IPO.
Additionally, LIC has been a port of call for various PSU fund raises in the past.
Once a behemoth the size of LIC goes for listing, it will be interesting to see if other private life insurance companies will still be able to attract funds at expected valuation.

(3) Impact on growth

The size of the IPO will determine the extent of liquidity it will suck out, but Indian markets do not have depth to take the issue of a very size.
Critics argue that it’s too early for LIC to go public. LIC could see plenty of high growth despite the ongoing slowdown in the economy.

(4) Fears of disclosure

The company’s books and operations have been opaque for far too long but it is trusted by 250 million policyholders.
It could have been the saviour for many more listed state-owned companies, but the government has decided to sell the golden goose itself.
LIC is also famous for investing millions whenever stock market tanks, just to prop it up.
But once it is listed in the market, these tricks will be impossible to execute. The disclosures will lead to a lot of discontents due to NPAs.

(5) Investors trust

Being one of the biggest financial institutions of the country, the move to privatise LIC will shake the confidence of the common man and will be an affront to our financial sovereignty.
The very purpose of LIC to provide insurance coverage to socially and economically backward class at a reasonable cost will be defeated and motto will change from service to profit.
The sovereign guarantee element currently enjoyed by each LIC policyholder might cease to exit after the IPO. Some policyholders may then find it hard to trust LIC.

Way Forward

LIC is all set to see significant disruption. The scale of that disruption would be unprecedented within the organization and outside.
Over the years, LIC has become ‘the lender of last resort’ to the Government of India.
Confronted with an unprecedented fiscal deficit and worried by an economy in crisis, the government has to find resources.
This disinvestment is also a preferred option for ideological and practical reasons.
The government could utilize the money gained by selling off its stakes to improve services in public goods like infrastructure, health and education.
However, listing LIC wouldn’t be an easy task and calls for a political will.
In the new avatar, LIC would have to benchmark itself against private insurers and global insurance giants.