Saturday, February 15, 2020

LIC disinvestment is not a great idea

The FM's announcement in the budget about LIC going in for an IPO was roundly cheered by market analysts. Apart from the fact that it is intended to fetch Rs 90,000 crore in revenues to a cash-strapped government, analysts lauded the move saying it would lead to greater transparency and improved governance.

Now, 'transparency' and 'better governance' are things it's hard to argue with. However, it's worth remembering that these are not ends in themselves. In the context of a commercial institution, they are meant to result in better performance and outcomes.

The case for an IPO at LIC must, therefore, be that it's under-performing at the moment and that an IPO would result in better performance. This is simply not true. LIC is an outstanding performer, judged by any criteria one would like to apply to an insurance company. The entry of private companies into insurance, far from undermining LIC, has led to a surge in sales volumes. LIC still commands 70 per cent of the market for insurance premiums. It offers returns on annuities that hardly anybody in the market can match. And it is financially sound.

LIC has achieved these outcomes while performing a larger social role. It intervenes to support the markets where required. It is a big investor in public sector banks and is now the majority shareholder in IDBI Bank. It has a terrific reach in the yet under-served rural areas. LIC's social role has not   come in the way of commercial performance.

There's no case, therefore, for LIC being listed on the exchanges at this point- you can't seriously say that listing is necessary in order to improve outcomes. What listing would do is call into question the larger social role that LIC performs. We still need an institution that can support the market given the fickleness of foreign investors. Until a measure of stability returns to the banking system, it would not be wise to list LIC as retail and institutional shareholders could challenge its socially-driven actions as inimical to shareholder interest.

The only reason for listing LIC is that it will fetch enormous revenues for the government. That's not a good enough reason for an institution as vital and vibrant as LIC.

The good news is that listing LIC would require parliament to amend the LIC Act. LIC unions are opposing the move. Valuation of LIC and other steps required for listing would take a couple of years, so it's unlikely that the listing will happen in FY 2020-21.

Frontline carries a good article on the subject.

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