LIC IPO presents a paradoxical situation, raises new issues of corporate governance

Dilution Potential

At this stage, specific details of the public issue are not known. At what value would the shares be issued, and thus how much amount would be raised are questions that would be answered once the official announcements are made, and the draft offer documents filed.

But considering the regulatory requirements for an IPO and listing, a dilution of at least 5 percent would be required. Which would also need to be scaled first up to 10 percent in two years, and then to 25 percent in the next five years. Even for a 5 percent dilution, estimates of the amount that could be raised have been suggested by analysts to be upwards of Rs 75,000 crore. A cumulative 25 percent dilution in the coming years would mean an aggregate amount of at least Rs 3.75 lakh-crore! The dilution can be even further up to 49 percent, beyond which though amendment to the law would be required.

Double-edged Sword

The LIC presents a paradoxical situation to some extent. Like nationalised banks, the LIC is preferred often for the perceived safety and assurance of getting the policy amount by the policyholders. The LIC even has a 100 percent sovereign guarantee for dues to its policyholders. That, in its own way, even if it may not be the core intention, may be a major source of its popularity, and hence profitability, even if other private companies may be perceived to give better service to customers.

If the LIC is privatised even to an insignificant extent, the perceptions may change. Pressure to satisfy private shareholders, who obviously would be the source of funds under the IPOs, would mean more focus on profits. As a private entity, pressures to be competitive in other aspects would also be more. If this leads to the LIC transforming and becoming nearer and nearer to other private companies, it would be a double-edged sword.

It may become more competitive and profitable on one hand, but that very quality may result in it losing some of its edge of safety. Of course, its sheer size both in terms of assets and market share — thanks also to a monopoly lasting decades — itself gives a huge edge that may last for a long time.

Many Questions

Then there is the question that is faced by every government-owned company coming with an IPO — will it comply in letter and spirit with corporate governance and other norms as other non-government companies are subject to? Will the fact that majority holding and effective control will remain with government mean that public policy and norms, and even management style will still have a major say? Interestingly, the LIC Act was amended substantially in 2021 to introduce several provisions relating to corporate governance, some of which directly link the requirements to SEBI norms.

However, still, these amendments do not go all the way. Indeed, laying down these norms in law will have two consequences. Firstly, to begin with, they will remain different from SEBI norms that are applicable generally to listed companies. Secondly, while SEBI norms are dynamic and constantly updated, the norms for LIC will remain relatively static as each change would require a long-drawn process of amendment the Act.

The question then would be investors from whom such huge amounts are raised would end up being short-changed, and subjected to lesser norms? Considering that even this huge IPO is to be followed up by further IPOs of other government companies, the question whether there should be two regimes will arise repeatedly.

Regulations And Guarantees

Even after the amendments made in 2021, the chairman will still be appointed by the Union government. So would each of the managing directors. Non-government shareholders would have an opportunity to elect one board member if their holding is up to 10 percent, and two if more than 10 percent. Clearly, this is far from enough, and at least a policy declaration on how close control of the government would be diluted/removed should be made.

The positive side though is that, at least under the existing scheme, the LIC may have to comply with both sets of regulations, and where the requirements of SEBI are more onerous, they should apply.

Section 37 of the LIC Act effectively gives sovereign guarantee to policyholders for their dues under policies. The question then would be whether, as the LIC privatises, the Union government should continue to undertake such liability? Ideally, there would be a cut-off date (linked with perhaps percentage of public holding) and liabilities to policyholders created after such date would not have such guarantee.

What About The Investments?

Then there is the question about the investments of the LIC. The LIC holds huge stakes in other listed companies in the private sector. Whether the policy of acquiring, holding, and voting on such investments would continue to be affected by public policy, or will it have to be in accordance with what is best for interests of investors as shareholders? Section 21 of the LIC Act gives powers to the Union government to give directions in matters of policy involving public interest, which the LIC would have to take guidance from.

These issues will come up also for other major divestments/privatisation said to be in the pipeline. It is best if these issues are dealt with head on. The privatised companies face the opportunities and pressures both of competition with the government neither meddling in, nor supporting such companies.