Finance Minister Nirmala Sitharaman had announced a disinvestment target of Rs 2.1 lakh crore in Union Budget 2020-21. While this disinvestment will be critical for keeping the fiscal deficit in check, its proceeds are only one part of the story. The disinvestment of the Life Insurance Corporation (LIC) has the potential to push the insurance and financial sector towards greater transparency, efficiency and performance.
Preparing LIC books for listing may take more time than anticipated. These issues of timing and concerns about the fiscal deficit have overshadowed the debate on the LIC disinvestment. The disinvestment, when it happens, can be a significant positive step towards financial sector reform. Whether this actually happens will depend on the government’s mindset, a change in the mandate of the LIC, and the government’s expectations from it.
There are concerns that the disinvestment of LIC may not happen during fiscal year 2020-21, as planned in the Union Budget. The books of accounts of LIC contain many assets and entities purchased due to various government priorities over the years. While private sector insurance companies are regulated by the Insurance Regulatory and Development Authority (IRDA), LIC is governed by a separate act of Parliament, the LIC Act.
While any other insurance company would normally have been regularly valuing its assets and liabilities and doing a ‘mark to market’ or valuing them in today’s terms, in the case of LIC, this has not been done.
The government expects to get about Rs 90,000 crore by selling 6-7 per cent of LIC in the coming year. However, the gains from the LIC disinvestment can go beyond the revenue that will be earned.
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Three potential gains
We can expect three key gains from the LIC disinvestment.
First, the disclosure required for the IPO will bring transparency to the opaque balance sheet of LIC. The insurance sector has been crippled by this behemoth insurance company that often stepped into the market for fulfilling the agenda of many governments. In many instances, it might have supported stock prices if that was the government’s priority. It has purchased companies, particularly public sector companies, that were weak and the government wished to sell off.
It is hoped that listing will push it towards greater transparency and help improve efficiency. Even partial privatisation, or listing through which government sells some part of its shareholding to private investors, is known to bring positive benefits to the companies. In a study of Indian public sector firms, Nandini Gupta, a US-based academic, has found that there are gains in terms of efficiency.
Second, market discipline may put some constraints on governments who often ask LIC to step in and invest in weak financial firms. A report in ThePrint by Remya Nair shows that LIC has stepped in to invest in weak PSUs and lost money. It has helped the government meet its disinvestment targets, rather than optimise on the returns that it expects to get.
Third, with the greater transparency that comes with being listed, resource allocation in the economy may improve. LIC is a huge player in the financial sector. It is a financial firm that makes decisions to allocate finance to competing projects. If these decisions are made on the basis of which projects are more profitable, rather than trying to prop up weak PSU firms which no one is willing to buy and have good money chase after bad money, the allocation of resources in the economy would improve and lead to greater productivity improvements to that extent.
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Will LIC still run like a normal insurance company?
However, all these gains depend on whether after the listing, LIC will be allowed to run as a normal insurance company. The State Bank of India is a relevant example. Even though SBI is owned by the government, its portfolio is much cleaner and it is not asked to step in when the government is unable to find buyers. For example, when the state-owned loss-making IDBI bank required a buyer, the government asked LIC to purchase it. It could have been argued that it was far more normal for a bank, SBI, to purchase a failing bank, rather than for an insurance company, LIC, to buy it.
LIC’s purchase of shares of GIC, New India Assurance, Hindustan Aeronautics and NTPC were driven more by the needs of the government’s disinvestment programme than giving value to shareholders. The present legal arrangement is one through which LIC pays 5 per cent dividend to its only shareholder, the government, and the remaining to policy holders. Private insurance companies, on the other hand, usually pay 10 percent to shareholders and the remaining to policy holders. It is possible that to make the LIC offer more attractive, the LIC Act may be amended to pay 10 per cent to shareholders.
This would help improve the pressure on management to have a more productive asset portfolio. While all this is possible, ultimately, as the government would remain the largest shareholder of LIC, the outcome will depend on whether this is part of a larger financial sector reform agenda or merely a revenue exercise.
The author is an economist and a professor at the National Institute of Public Finance and Policy. Views are personal.
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LIC is much bigger than ONGC, which has been hollowed out by the government, as reflected in its plunging market cap. In its present state of fiscal adventurism / desperation, the government has been overdrawing from aquifers that have been created since Independence. LIC has been at the receiving end of the government’s affections for a long time. The buyer of last resort for PSB shares as part of disinvestment. IDBI Bank was a particularly egregious example. Institutions like SEBI of IRDA are powerless before the government’s vacuum cleaner. One looks at LIC now with trepidation for its future.