LIC IPO: Centre’s intriguing move and spectre of ‘backdoor nationalisation’

All eyes are set on the blue-chip LIC IPO that is expected to hit the markets soon. The largest life insurance company in the country is all set to go public. The Department of Investment and Public Asset Management (DIPAM) was busy amending the Life Insurance of India Act, 1956 to avoid regulatory impediments and facilitate listing of the company.

A few questions crop up here: First, is this disinvestment exercise truly a step towards reducing the government’s control in LIC? Second, why is the government disinvesting in a profit-making company? Third, is this strategy aimed at achieving disinvestment targets?

During the 1990s economic crisis, then finance minister Manmohan Singh came down heavily on public sector inefficiency. “The public sector has not been managed in a manner so as to generate large investible surpluses,” he said in his speech. “The excessive and often indiscriminate protection provided to the industry has weakened the incentive to develop a vibrant export sector. It has also accentuated disparities in income and wealth. It has worked to the disadvantage of the rural economy. In particular, the public sector has not been able to generate internal surpluses on a large enough scale.”

“At this critical juncture, it has therefore become necessary to take effective measures so as to make the public sector an engine of growth rather than an absorber of national savings without adequate return.” (Budget Speech, July 24, 1991). Following what he preached, it was Singh who made the first attempt to disinvest government equity from Central Public Sector Enterprises (CPSEs) with an objective to generate revenue; the only politically acceptable solution at the time. Strategic disinvestment from CPSEs was put forward to justify the disinvestment policy.

The move to disinvest from LIC, the dominant player in the insurance industry, is, however, intriguing. Based on the premium collected, the corporation has enjoyed about 2/3rd market share in the life business, 75% share in the non-linked plan market, and 7% growth in valuation surplus over the last five years. The corporation settles a record number of claims and has a substantially lower proportion of unfair business practices cases against them. LIC also allocates a large proportion of valuation surplus to policyholders as a bonus. The corporation actively provides disinvestment support to the government by purchasing a substantial proportion of stakes in the Public Sector Units (PSUs) from which the government is withdrawing.

Thus, in terms of business operations as well as social responsibility, LIC seems to be a rather productive, efficient and responsible organisation, making the case for disinvestment rather weak. The company promoted a philosophy by focusing on the promotion of non-linked plans as can be seen from the low market share in terms of premium collected under the market-linked plans (less than 2%). The non-linked plans provide low but guaranteed returns to the policyholder or their beneficiary at their time of need, although the company has to bear a long-term liability.

Torch-bearers

With private equity being introduced, LIC will have to focus on increasing linked plan business, shirking off its liabilities at the cost of increasing the risk for the insured. This will bring to an end the welfare-oriented dominance of LIC, advancing a step towards state-owned market-oriented enterprises. Needless to say, this will be in tune with the philosophy of the torch-bearers of privatisation (set up in the 1990s).

Turning to the disinvestment exercise, a pertinent question is: is the government really prepared to relinquish its control over this cash cow? Looking at the experience from disinvestment in the banking sector, while the government seemed to have adhered to the Narasimhan Committee’s recommendations to reduce control, government stakes in public sector banks never dropped below 51%. Further, the banks have been under government control, either directly or indirectly, through government-controlled agencies. LIC may suffer a similar fate. The government may not off-load more than 49% stake in the corporation, and government-dominated agencies would pick up a large slice of the LIC pie; the control of the corporation thus remaining with the government. The IPO exercise will then collapse into another attempt of the government towards backdoor nationalisation.

This backdoor nationalisation, however, comes with a benefit for the government, the majority stakeholder. Presently, LIC is required to share only 5% of the valuation surplus in accordance with the Life Insurance of India Act, 1956. However, after disinvestment, LIC will be required to share 10% of the valuation surplus as per the practice followed by insurance companies in the private sector. The government will thus benefit by receiving an additional 5% of the surplus by giving up only a part of the ownership in the corporation. This additional revenue to the government will of course come at the cost of the bonus that LIC presently pays its policyholder and will attract only a little criticism.

Yet another consideration that the government seems to have pertains to the disinvestment targets. The government has been missing its disinvestment targets over the years. Attempt to disinvest the Bharat Petroleum Corporation Limited (BPCL) turned into a fiasco, leading to the process (probably) being pushed to the next fiscal. The FM, in her budget speech earlier this month, also made a downward revision to the disinvestment target for the upcoming financial year. In this context, disinvestment from LIC can play a major role in coming close to achieving the disinvestment target. This will also help the government signal the seriousness of their intent of (pseudo) disinvesting from the CPSEs.

It seems that the government through the LIC IPO has shown a great deal of fiscal acumen: trying to eat the cake and have it too. It may however be setting a dangerous precedent for the future, where governments may mismanage public finances and then sell off profit-making assets to cover their tracks.

(The writer is Professor, Department of Economics, Alliance University, Bengaluru)