Last week in the Part-1 of this article, we saw the perspective of Govt. of India as to why it is almost impossible for Govt. of India to privatise LIC. The LIC is a hen which gives a golden egg every day, and Govt. will not cut its throat in order to get all the eggs at a time.
Please click this link to read Part-1 of this article: http://bit.ly/LICsprivatisation
In the Part-2 of this article, we will discuss LIC’s perspective & Policy Holder’s perspective as to how they will get impacted if at all LIC gets privatise.
LIC’s Perspective:
1. Capital infusion by Shareholders:
I believe, it will surely work well for LIC. Today, LIC is working with just 100 Crore initial capital & creating wonder. LIC has started all its foreign subsidiaries like, LIC Lanka, LIC Nepal, LIC Bahrain, LIC Singapore, LIC Bangladesh with just 100 Crores capital. After privatisation, LIC will get more capital. Just imagine, what will happen if LIC gets 1,00,000 Crore additional capital! There are all possibilities that LIC may conquer its market in US & Europe. It may buy bigger infrastructure within India. It may expand its operation at a bigger level. LIC will have more money to spend on its human assets like Chairman, Actuaries, Fund managers & so on. Offices & working conditions will be at par with multinational companies.
Rs.44,000 Crores of LIC is already with Govt. as a Solvency margin. These monies belongs to Policy Holders. The moment LIC gets 1,00,000 Crores from shareholders, it will release 44,000 Crore from Govt. and can be distributed amongst policy holders as an extra bonus.
2. Independent people may enter the Board:
After privatisation, private independent people will enter into management and the board. It is not new for LIC. Now, it is the practise being followed to invite independent people to become director of LIC. For example, Mr. Deepak Parikh, chairperson of HDFC, was on LIC Board 3 years ago. Thus, LIC is accustomed to it. This will not make any difference to the working of LIC.
3. Sovereign Guarantee:
Being the sole promoter of LIC, Govt. of India has provided seed capital Rs.5 Crores (only) to LIC in 1956 to start its affairs. In return LIC pays 5% share of its yearly surplus to LIC since 1956. Last year LIC paid Rs. 2,430 Crores as just 5% share of its profit.
Photo Credit: www.dailyexcelsior.com
https://www.dailyexcelsior.com/lic-chairman-hands-over-rs-2430-cr-cheque-to-fm/
Govt. has also provided Sovereign Guarantee to LIC policyholders. In case of any financial crunch or crises Govt. of India is liable to pay each policy holders Sum Assured + Vested bonus. This is the Sovereign Guarantee to LIC by Govt. of India.
Some people argue that, after privatisation, Govt. may withdraw this Sovereign Guarantee. Well, it is not necessary for the Govt. to withdraw this guarantee after privatisation. This guarantee is given under LIC Act 1956. Govt. may continue this after privatisation also. It is possible legally.
If at all Govt. withdraws this guarantee, it will not at all make any difference to LIC. The capital which LIC holds is so adequate, it does not need any back up from Govt.
In 1956, LIC was formed by merging 245 insurance companies. At that time, the seed capital of Rs. 5 Crores given to LIC from Govt. of India was not adequate to meet accumulated liabilities of 245 merged companies. The controller of insurance at that time (IRDA was not formed then) demanded additional security for the welfare of Policy holders. In addition to Rs. 5 Crores, Govt. offered Promissory notes taking Guarantee to pay the liabilities if at all LIC fails to meet the same for whatsoever reason. That’s how Sovereign Guarantee came into the existence. After initial 4 years, LIC performed so well, that the Sovereign Guarantee had no meaning 1960 onward.
Today, LIC’s assets are 31,00,000 Crores against Life Fund of 28,00,000 Crores. LIC is having 3,00,000 Crores excess funds over its liabilities. For LIC, now Sovereign Guarantee is not more than a piece of paper. But it does create trust amongst general public & holds value in the market.
So, withdrawal of Sovereign Guarantee will not really affect LIC.
Policy Holder’s Perspective:
Policy Bonus will increase after Privatisation:
Some people argue that after privatisation, LIC’s surplus will increase & it will result into more bonus to Policy Holders. This is wrong assumption. Any listed Insurance company maintains two types of books of accounts; Shareholders’ account & Policyholders’ account. Shareholders fund will be treated as Capital to the company and Policy Holder’s fund (Life Fund) will be treated as liability. 90% of the total profit earned on Life fund will be distributed to Policyholders & 10% will be paid to the Shareholders. The shareholders are not entitled to get a single rupee from 90% share. After privatisation, 10% share will be distributed amongst so many shareholders which is at present given to only one shareholder i.e. Govt. of India. Therefore, Policy bonus rates will not be affected; neither positive nor negative. (N.B.: Though Govt. of India is entitled to take 10% share, at present, it is taking only 5% share form the profit.)
We discussed different perspectives from view point of Govt. of India, LIC & Policy Holders.
After reviewing these points, there are very thin chances that Govt. decide to privatise LIC. If at all Govt. decides to do it, they may disinvest roughly 5% of its shares, and it will be very difficult for any single private player to buy the whole 5% shares at a time. If Govt. decides to float 10% shares, it will be very difficult for the giants like Reliance & Tata (also) put together (their combined strength) to buy these shares as amount involved would be extremely huge.
If LIC stays as a Govt. enterprise, it is in the interest of our Nation. Corporate bodies will constantly pressurise. Time & again, we will come across such news as competitors have a big financial muscle working for them. Logically speaking, it is almost impossible for Govt. to list LIC. If Govt. is very desperate about getting money from whichever source, it may do it, but it is against the interest of our country.
Jai Hind!
