Budget 2022 | Realism over FY23 divestment aim leaves questions over LIC IPO proceeds

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Like most budgets, the devil lay in the details when it came to the government’s disinvestment target for the next fiscal year.

The budget document showed that the government aims to collect Rs 65,000 crore from disinvestment in state-owned companies in 2022-23, a far cry from the Rs 1.75 lakh crore set out for 2021-22.

Heading into the budget, economists had pegged the disinvestment target for the next fiscal year at Rs 1.2-1.5 lakh crore, which explains the collective gasp from the financial community when the estimate for next fiscal came out.

Even the equity market tottered as benchmark indices erased more than 1 percent of gains while the Nifty CPSE Index fell nearly 1 percent. By the close of the session, benchmark indices recovered to close nearly 1.5 percent higher, while the CPSE index pared most losses.

The omission of the disinvestment target from finance minister Nirmala Sitharaman’s speech was telling given the government’s razor sharp focus on reducing its presence in business.

The lower-than-expected disinvestment target has left economists, market participants and even reporters wondering where Life Insurance Corporation of India’s (LIC) proposed initial public offering (IPO) figures in all this.

While the finance minister said the IPO will go through in the current financial year in all probability, the divestment numbers have raised concerns over how much the government is likely to raise. Taking into account the numbers presented by the budget, there are three possible scenarios on how the LIC IPO will affect the government’s receipts from disinvestment.

1. The two-part theory

In August, it was widely reported by several media houses that the government could divide the entire issue of LIC into two parts given concerns that its large size, the biggest in Indian capital market history, could be too much for the market to handle.

If that’s the case, it is possible that the government is aiming to raise around Rs 54,000 crore from the first phase of the LIC IPO. This gains credence since the revised estimate for disinvestment has been pegged at Rs 78,000 crore for the current fiscal, and given that so far the government has raked in a little over Rs 24,000 crore .

2. Moderation in ambition

Early last month, Bloomberg reported that the government is seeking a valuation of $203 billion from investors for LIC. At that valuation, a sale of a 5 percent stake by the government could help it fetch Rs 75,000 crore.

If the LIC IPO is likely to be done in one swoop, it may imply that the government has moderated its expectations on the valuation front. Analysts had widely expected the life insurance behemoth to be valued at close to $160 billion (around Rs 12 lakh crore).

If the government expects to raise Rs 54,000 crore from a 5 percent stake sale in LIC this financial year, it will peg the company’s valuation at Rs 10.8 lakh crore.

“Looking at the disinvestment target, clearly, the government is not going to dilute its stake in LIC to the fullest of 10 percent,” said Shubhada Rao, founder, QuantEco Research.

3 The humble budget

In Budget 2021-22, the striking quality of the government's assumptions on expenditure and receipts was the conservatism it displayed. Despite signs of a buoyant recovery in the formal sector, the budget had made very modest expectations for tax growth and other receipt items.

There is a possibility that the government has gone with a similar approach this year as well with several budget receipt expectations being conservative compared with what economists expected.

A comment by Amitabh Kant, chief executive officer of NITI Aayog, to CNBC-TV18 points to this line of thinking: “I am glad that budget target has been kept low. It is better to overshoot that target, which I am quite sure we will actually do in the coming year.”

“I think we have been very realistic,” Sitharaman said in her post-budget press conference.

With several targets like Bharat Petroleum Corporation, Container Corporation of India, Shipping Corporation of India, three general insurance companies and two state-owned banks still in the process of finding buyers, perhaps the government aims to overperform this time around.