The Finance Bill has taken a very bold step to announce the listing of Life Insurance Corporation
(LIC). Truly, LIC
has held a prime position in Indian history. Its contribution to the economy is unparalleled. With the life fund of about Rs 30 trillion, it is one of the biggest balance sheets in the nation. The institution will contribute, by way of listing and offering the government equity shares to public, a sizeable amount.
There are a few interesting facets of this offer, which will need evaluation before the IPO is conducted. One of the critical issues will be whether the sovereign guarantee which is offered by the government to meet the contractual obligations between the corporation and the policyholder shall continue. This is the prime reason why the government has invested Rs 100 crore by way of capital and the sovereign guarantee serves as the capital. In the year 2000 when the IRDAI Act was enacted, the regulator introduced the required solvency margin (RSM) regulations. To create stability in the insurance sector, the regulator required all the companies to hold net owned funds and unencumbered asset to the extent of 150 per cent of the actuarial liability. The gap between the two has to be funded by the promoter by way of equity capital. There was no such regulation prior to the formation of IRDAI and LIC
was the only life insurance company. A substantial gap in the RSM was determined in the case of LIC
with the introduction of this regulation.
Media reports suggested the RSM exceeded Rs 30,000 crore. The promoter (government) was unable to contribute this amount and therefore over a period of time this amount was built up from the policyholders’ funds. The RSM continues to grow with new business written by LIC, less of course the matured contracts, since the year 2000. From 2000 till now, policyholders have contributed this surrogate capital. Regulations also provide that the actuarial surplus belongs to the policyholders to the extent of 90 per cent of such surplus. The balance is available to the shareholders. In case a company is growing and the surplus is not adequate to meet with the RSM obligation arising out of such growth projections, the shareholders keep the surplus with the company. In the case of LIC, with a sizable inflow of new business the government could have decided not to receive dividend from the surplus and hold back the capital with the corporation. Every year, the government decided to take 5 per cent of the surplus amount generated by LIC. The government has collected over Rs 25,000 crore by way of annual cheques from LIC as dividends during these years. The justification, and a valid one perhaps, is that the sovereign provided an unconditional guarantee to all policyholders towards the contractual obligations of the corporation.
Thus, the withdrawal of the guarantee will render the policyholders the actual shareholders of the corporation. To that extent, policyholders will sacrifice the intrinsic value in the contract they hold and contribute to the economy by way of funding the Budget. The second major aspect that will also play a significant factor for investors is the ability of LIC to compete in the market without the sovereign guarantee shelter. Currently, it does not require capital for RSM to be contributed. Also, people will have less comfort to buy policies.
One more factor needs to be examined before the listing of LIC. The capital markets regulator will have to determine the regime of disclosures to meet the regulations as well as — and more importantly — ensure investor protection. The insurance regulator is responsible for protecting the policyholders and the markets regulator will have to ensure investor protection by way of disclosures. Related party transactions disclosure could be a thorny issue. Perhaps the experience of public sector bank listing of disclosures with forbearances might be useful. In this backdrop, the various decisions with regard to investments in various public sector or related entities will also need a fresh approach towards approval as well as disclosure. Analysts and fund managers in case of institutional investors and the retail investors themselves will have to be provided with some comfort regarding such investments with financial justification.
Then again, the disclosure will require the funds and its management of par and non-par businesses of LIC to be separated. Finally, the LIC Act will have to be amended to incorporate provisions of governance, board positions and genuine induction of independent directors. These steps will make the possible investors comfortable about investing in LIC shares.
To conclude, this is indeed a landmark decision in the history of the corporation. It will render it more transparent and efficiency. And certainly, it would enable policyholders to make a significant contribution to the economy. The deployment of their funds will trigger the necessary growth in the economy.
The author is managing partner, Ashvin Parekh Advisory Services LLP.
Views are personal