LIC Privatization Disinvestment News

Finance Minister Nirmala Sitharaman announced in her Budget 2020 speech that the government will sell a part of its holding in Life Insurance Corporation of India (LIC) through an initial public offering (IPO).

• The Parliament of India passed the Life Insurance of India Act on 19 June 1956 creating the Life Insurance Corporation of India, which started operating in September of that year.
• It consolidated the business of 245 private life insurers and other entities offering life insurance services.

India’s largest financial institution

• LIC has total assets of 31 trillion rupees (~31 lakh crore OR $434 billion).
• LIC has 1,11,979 employees and ~12 lakh agents.
• Profit of Rs 48,444 crore for FY2018
• 76% market share in Insurance sector.
• Monopoly till 2000.

What sets the LIC apart from other insurers?

• The government owns 100% of LIC.
• It is the only insurer offering sovereign guarantee meaning that the policyholders funds are completely secure.
• This is the reason that LIC policy premiums are higher than private sector counterparts.

What is an IPO?

• An initial public offering (IPO) refers to the process of offering shares of a private* corporation to the public in a new stock issuance.
• Public share issuance allows a company to raise capital from public investors.
• LIC’s stake sale is likely to be under 10%

LIC Disinvestment Possible delays

• LIC was set up under a special act in 1956.
• Hence the government will have to amend the law, a process that may delay the sale beyond March 2021
• An inter-ministerial committee will be set up to decide on the roadmap and extent of disinvestment.
• Target is to bring the IPO by second half of FY 2020-21.

Aggressive disinvestment

• The govt has targeted an aggressive disinvestment programme.
• The government has set an ambitious target of ₹2.1 trillion(2.1 lakh crore) for the sale of government holding in state-run companies .
• It includes ₹90,000 crore to be raised from an IPO in LIC and a stake sale in IDBI Bank.
• The aggressive stake sale plan comes against the backdrop of declining tax collections and a sharp deceleration in the economy

Why haven’t the earlier governments done so (sold stake in LIC)?

• LIC has been used as an investor of last resort in the past to support the markets by buying shares of state-run companies.
• It also bought shares of state-owned companies during divestment and when investor participation was weak.($1.4 billion in ONGC IPO).
• It was also called in to bail out IDBI Bank, which had been severely hit because of bad loans in 2018.(~10,000 crore).
• 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.
• In FY19, LIC invested around Rs 68,620 crore into the equity market.
• It also provides funding for many infrastructure projects – Rs 3,76,097 crore as of March 2018.

Largest Indian Company on Share Market ?

• LIC owns double-digit stakes in several publicly traded firms, including Bharat Heavy Electricals Ltd. and Larsen & Toubro Ltd., that are collectively worth more than $80 billion.
• If LIC shares are listed on stock exchanges, it could easily emerge as the country’s top listed company in terms of market valuation.

Top 10 Largest Indian Company 

World’s largest company

• Saudi Aramco, Saudi Arabia’s state owned oil company brought its IPO in December 019.
• It raised about $30 billion in the world’s biggest-ever initial public offering.
• It soon overtook Microsoft Corp. and Apple Inc. as the most valuable listed company.

Benefits of LIC going public

• The government is expecting over ₹70,000 crore from the sale of an undisclosed stake in LIC.
• Listing of companies on stock exchanges disciplines a company and provides access to financial markets and unlocks its value.
• It also gives opportunity for retail investors to participate in the wealth so created.
• Unlike unit-linked insurance plan (Ulip) investors, who have a clear visibility on the daily performance of underlying funds, the endowment policyholders’ visibility is limited to annually declared bonuses.
• Public listing of LIC will lead to more disclosures of investment and loan portfolios and better governance, with greater transparency and accountability.
• Listing will allow analysts to monitor LIC’s governance.