The Union Budget of India is announced every year by the Finance Minister. This tradition was followed in the year 2020 as well when the budget was presented by Finance Minister Nirmala Sitharaman. The budget is made keeping in focus all households, businesses & government sectors. Oftentimes, we see a repeat of some common themes across all budgets, however, this year’s budget presented us with an unusual surprise.
“The government now proposes to sell a part of its holding in LIC by way of an initial public offer (IPO),” sent waves of shock and surprise to millions of Indians, especially those who have invested their savings & income in the company and are ‘LIC policyholders".- Nirmala Sitharaman
LIC has regularly been instrumental in the quest to bail out several distressed public sector undertakings (PSU) & is considered one of India’s biggest institutional investors. Companies like Institutional Development bank of India (IDBI), Infrastructure Financial & Leasing Services (IF&LS), Reliance Capital, Yes Bank, Dewan Housing Finance, Reliance Capital, Reliance Home Finance, Jaypee Infratech have two things in common, one is making headlines for debt defaults, continuous losses & downgrades, the other is being backed by LIC.
Many challenges will pose threat to the company and millions of shareholders before listing the behemoth. Every year LIC generates huge profits & according to its redistribution policy, the profits of LIC are divided into the ratio 95:5 which further means that LIC pays 95% of the surplus back to its policyholders and the remaining 5% goes to its only shareholders, the government of India currently. This bodes well for the government but as the shareholding in the company will increase, the 95:5 ratio would require change. Imagine becoming a shareholder in LIC after spending huge money into buying its shares but not being able to enjoy the ploughed profits, feels bitter, doesn’t it?
LIC would need to change its redistribution proportion and design the policy similar to other listed private insurance companies before the IPO. Now, the valuation of insurance companies is primarily based on a concept called ‘embedded value’, which takes into account future profits that the company will earn from already issued active policies and the existing value it adds to shareholders.
LIC manages 31 trillion out of 40 trillion insurance industry and is much bigger than the rest of the 23 life insurance companies operating in India. As such we are all eager to see how the IPO goes. There is no denying the fact that listing the biggest insurer of India would certainly bring more transparency and accountability in the insurance sector but there is still no guarantee the government won’t use LIC for its own interests. It is going to be interesting to see when and how the disinvestment shapes up.
