We have often come across news about LIC getting privatise. Several times we have heard that Govt. is likely to list LIC in near future. We don’t know about the authenticity of these news but one thing is pretty sure that media gets enough contents when they raise the issue of disinvestment of LIC. Not only disinvestment, any news about this largest company attracts attention of common people & experts and media gets a huge TRP/readership.
Every 2 or 3 years, media comes up with such news about LIC’s listing.
Why these news have become sensational? One of the reasons could be the present Govt. in power. I don’t want to get involved in the debate about whatever existing Govt. is doing is right or wrong, but we all have felt that once the present Govt. has decided to take up any issue, it gives results. They have a strong political will behind taking any matter to the conclusion. But there is no logic behind listing of LIC in capital market.
To give justice to the topic, I have gone deep into the details. As a result this article has become little lengthy. For the convenience of the readers, I have divided this article into 2 parts. In the Part-1, we will discuss from the perspective of Govt. of India as to why it is almost impossible for the Govt. to privatise LIC. In the Part-2, we will discuss the same topic from the perspective of LIC and the Policy Holders.
Govt. Perspective:
1. Listing of LIC for Capital requirement:
Govt. of India may decide to privatise LIC by listing it in the market to raise capital. Previously Govt. has taken this step for raising the capital to run the loss making Govt. companies like ONGC.
Why Govt. did disinvest ONGC? Because it was making losses and Govt. had no money to run the ONGC. That’s why Govt. sold its control over ONGC.
But here, the situation is not same for LIC. LIC is having more than adequate capital. Let’s discuss this with an example. In FY 2017 – 2018, LIC sold 3 Crores + policies (number of policies). That means LIC’s liability also increased up to that extent. Every life insurance company must provide for a solvency margin against each new policy sold. It must keep aside a certain amount of money (reserved towards solvency margin) to meet liability towards each new policy sold. But for that financial year LIC did not provide for Solvency margin at all. Why? Because, LIC had already excess money in reserve, so there was no need to provide for a solvency margin. It’s a rare phenomenon; company selling 3 Crores + policies and did not provide a single rupee towards the solvency margin! This incidence is worth applauding.
There is a very simple logic, why an owner of the company floats company’s shares to capital market? Because the owner needs capital (money) to meet expansion, to meet fixed capital, to meet working capital, to meet reserves. Here there is no such situation. LIC has enough capital for all the above purposes, without the support of the shareholders, then why should the owner (Govt. of India) list the LIC? So there is no need to list LIC for the Capital requirement.
2. Govt. may get revenue by listing LIC:
There is one chance that to get revenue (to get more money to run other affairs), Govt. may list LIC so that it can collect some money from the shareholders. Govt. is always in need of money to run it’s affairs. But in this case, by getting revenue, Govt. may lose its capital & control over LIC. Many times we have heard that LIC has saved Govt. of India, our economy, stock exchanges, and the nation as a whole.
We all know that, last year LIC purchased 55% stake of IDBI Bank. No other company (including giants like Reliance, Tata and Birla) would have money to buy this bank & pay the amount at a time. They could have paid in cuts & pieces like 1% or 2% at a time. It could have easily taken 2 years for Govt. to receive the money fully, if this bank would have been sold to any private entity by Govt. There is only one company in the country which can provide the full money at a time; and that is LIC.
If at all, listing of LIC takes place & such IDBI type of national economic crises happens, at the most LIC can put forward the proposal to AGM. Nothing else LIC or Govt. of India will be able to decide about the same.
By saving IDBI, LIC has saved our economy, our country. When a Govt. bank is not able to fulfil its own commitments, then what will be the rating of our banks in international market? Who will invest in our country? If our rating in international market goes down, then Equity market & Bonds market, both will not be able to survive. Starting from a small scale companies to giant business houses, all will suffer due to poor rating of our country in international market. The whole economy may collapse due to poor rating of India in the global market.
This is not the one time LIC has saved our country, repeatedly LIC has done this. ONGC, BHEL, Hindustan Aeronautics, IDBI, IL & FS, Satyam Computers, many times.
LIC has promised to fund 704 Lakhs Crore in 12th Five year plan. Out of this, LIC has already released 6 Lakhs Crores. After disinvestment, shareholders will decide whether this amount will be used in National service or not. They may decide about the extent of contribution also. Normally, shareholders (investors) are selfish by nature. Why they would spare money for the betterment of Nation? (Please mind well, LIC has not given this amount as a donation to Govt. This amount brings a good rate of interest to LIC.)
So, by disinvesting LIC, Govt. may get revenue, but it will lose capital, it will also lose control over LIC. So there are very thin chances that Govt. decides to list LIC.
3. By disinvesting LIC, it will become more efficient:
There is a common argument that listing of LIC will increase its efficiency; since it is run by Govt., it is not that efficient. This is wrong assumption. There are so many private banks, insurance companies, private companies in other service sectors which are unable to match LIC’s performance, even today! This is the only company in the world which has given positive surplus continuously since last 63 years. There is no eligible company (in any sector like, insurance, banking, manufacturing, trading) to criticise LIC as far as efficiency is concern. Let any single company run the business continuously for 63 years profitably and then let it criticise the LIC. During these 63 years, LIC has seen everything; Govt. interference, Govt. control, different ideology of different Govt. (Indira Gandhi Govt. and Morarji Desai Govt. had different ideologies, Congress Govt. & BJP Govt. have different ideologies etc.), Catastrophes, Tsunamis, Wars, economic slow-downs, Stock Exchange booms & crises. Despite of all these, LIC has made profit since last 63 years. Please show us the single listed company in BSE or NSE to match this record of LIC. Not only that, please show us the single company in the world which can match this record with LIC (AIA, Prudential, Standard Life, Allianz, Zurich). Before pointing out on LIC’s performance, let these companies rectify their own performance in their respective countries for 63 years. We should be proud of LIC.
LIC’s provision for doubtful & sub-standard assets (Non – performing assets) is 0.43%. It is not the LIC who decides whether some assets are performing & other are not performing. There are 3 independent institutions who decides about sub-standard assets; Actuarial Society of India (ASI), Institute of Chartered Accountants of India (ICAI) and Life Insurance Council (association of all insurance company operating in India). After lending money to various bodies, after investing into so many equities, LIC has managed to control its NPA to 0.43% level. Please name one Govt. or private bank having NPA below 7%. Few banks are having more than 14% NPA. This is the remarkable performance by LIC in financial efficiency. How much more efficiency we can expect by listing LIC? Listed banks & companies are struggling to prove their efficiency. If there is an argument that, by listing LIC, it will become more efficient, then the listed companies should have proven this. But, this is not the case. Forget about matching the efficiency, no bank or company is closer to 0.43% mark. IRDA allows Life Insurance companies to have NPA up to 5%. But LIC has brought this well below 0.5% level. Now we can realise how efficient LIC is. We must admit that LIC is a publicity shy company. It has never encashed its performance. The LIC officials think that it is their duty to give their best, and they are doing it.
4. LIC will become more transparent after listing:
There is one argument favouring listing of LIC that it will become more transparent after listing. There are some disclosure norms that every listed company should follow so that policy holders be able to know what is happening in the company. Worldwide it is mandatory for all the insurance companies to get listed within 5 or 10 years’ time from its formation. So, after listing, LIC will disclose more data, papers, books of accounts which will add to transparency level.
Well, LIC is not a company under Companies Act 1956, LIC is a company under LIC India Act 1956. There is a separate Act which governs LIC. Though LIC is not liable to comply the disclosure norms under Companies Act, it voluntarily discloses all its documents & statements as per disclosure norms under Companies Act 1956. No additional statement LIC will have to disclose after getting listed, as it is doing it since last so many years. LIC can easily escape the CAG audit, but LIC has voluntarily adopted statutory audit every year. It has appointed 5 statutory auditors for this. And this practise is not recent or after IRDA took the charge as the regulator in year 2000; LIC is following this practise since 1960. So what more transparency can we expect after listing LIC?
We discussed 4 reasons as to why it is not logical to disinvest LIC from Govt.’s perspective. If at all Govt. is so desperate about getting more money, then Govt. possibly will disinvest the LIC; but it is not in Govt’s interest.
In the next week, in the Part-2 of the same article, we will see LIC’s perspective & Policy Holder’s perspective.
To be continued….
