State-owned behemoth Life Insurance Corporation (LIC) might be the government's radar for potential public listing, as it pushes for disinvestment in state-run firms and an asset monetisation programme this fiscal as per a report from The Indian Express.
The dilution is likely to happen with the sale of a small tranche through an IPO, followed by a further reduction in the government’s holdings. The first round of IPO will likely fetch a huge premium due to LIC's small equity base. The process is in the early stage, with discussions held within the government according to the sources the daily spoke to.
Premium valuation
LIC is the largest financial institution in India could easily become the country’s top listed company if its shares get listed on the stock exchanges points the report. They will rank number one in market valuation, beating the current leaders such as Reliance Industries and Tata Consultancy Services.
The insurer’s financials, as cited in the report, will ensure this premium valuation. On a capital base of Rs 5 crore, LIC last reported a valuation surplus, or profit, of Rs 48,436 crore for FY 2018 and assets under management of Rs 31.11 lakh crore.
Listing a company is believed to make the accounts more transparent with disclosures of investments and loan portfolios, leading to better corporate governance. The government had previously listed the shares of General Insurance Corporation and New India Assurance through IPOs two years back.
The budget had already proposed a minimum public holding of 35 percent for listed companies.
The divestment decision will further require an amendment to the LIC Act 1956. The LIC operates under the supervision of the insurance regulator 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 families of deceased policyholders.
The act also enables the state-owned insurer to obtain a special dispensation in several areas, including higher stakes in companies beyond the limit set by the IRDAI.
LIC has supported the market by buying shares during sell-offs and disinvestment offers. Therefore, governments kept away from listing the insurer due to its perceived role. LIC also has huge investments in debentures and bonds (Rs 434,959 crore), besides providing funding for many infrastructure projects (Rs 376,097 crore as of March 2018), according to its Annual Report for 2017-18, cited by the daily.
LIC’s reported profits were of Rs 23,621 crore from its equity investment during 2018-19, against Rs 25,646 crore during 2017-18. The insurer made a gross equity investment of Rs 68,621 crore during FY 2018-19 as per the report.
LIC Chairman MR Kumar did not comment on the listing plan when his response to the listing proposal was sought by the daily.
Huge investment base
LIC has been operating with a capital base of just Rs 5 crore as mentioned in the LIC Act of 1956, while the minimum capital stipulated for a life or non-life insurance company by IRDAI is Rs 100 crore.
But the corporation is known to handle huge funds when compared to this small capital base. The market value of LIC’s investment has seen a growth of 8.61 percent year-on-year to Rs 28.74 lakh crore in FY19, against Rs 26.46 lakh crore in 2017-18. Moreover, the total assets of the corporation crossed the historic figure of Rs 30 lakh crore for the first time to Rs 31.11 lakh crore, a rise of 9.38 per cent.
"Whether formally so declared or not, LIC is a systemically important insurer. Already the bail-out type investment proposals of LIC in ventures such as IL&FS are a subject matter of hot media debates. These are funds of millions of trusting policy holders. But yes, any divestment of stake will first require amendment to the LIC Act," said former IRDAI member KK Srinivasan.
LIC has been used to carry through several disinvestment programmes. The corporation had invested heavily in IPOs and follow-on offers of companies such as ONGC points the report. It was also called in to bail out IDBI Bank, which was hit with non-performing assets (NPAs) or bad loans last year.
LIC is also predominantly the largest investor in government securities and stock markets every year. On an average, LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
It had a valuation surplus—which is equivalent to profit in the case of LIC—of Rs 48,444 crore for the fiscal 2017-2018. LIC paid the government only 5 per cent of that sum, as 95 per cent had to be mandatorily returned to the policyholders.
LIC’s total premium income according to the provisional accounts for 2018-19—new and renewal premiums together—was Rs 337,185 crore, indicating a growth of 6.08 per cent, while the total benefits paid amounted to Rs 250,936 crore, growing by as much as 26.66 per cent. The insurer had mobilised Rs 41,086.31 crore as new premium in FY19 points the daily.
The total income of LIC, which includes the total premium and investment income, was around Rs 560,784 crore in 2018-19, a rise of 7.10 per cent, the report further elaborates. Therefore, the corporation’s policyholders can continue to expect a reasonable bonus for 2018-19.
But the top management has been concerned about the company’s performance and declining domestic market share. Its market share declined to 66.74 per cent in 2018-19.
According to the performance analysis by LIC’s top management, headed by Chairman MR Kumar, cited in the express report, the corporation has missed its own targets in most of the parameters during financial year 2018-19. This excludes pension and group scheme (P&GS).
Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
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