LIC IPO: The upcoming IPO of Life Insurance Corporation of India is interesting in many respects. One, its size is estimated to be huge and the company is selling only 5 per cent of its stake.
The next point is how the government-owned company will transform itself with the privatization and the high and different expectations from a new set of outside investors besides a new regulator.
Then, there is the question of how changing from a wholly owned government insurance company to a more market/investor centric company will affect its business and possibly lead to a conflict.
How many shares can be sold
At this stage, public issue details are not available. At what price the shares will be issued and how much money will thus come, that is the big question. The reply will be given only after the official announcement and draft offer document is filed.
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However, under regulatory conditions, at least 5 per cent stake will have to be sold. Which will have to be increased to 10 percent in two years and then to 25 percent in the next five years. By selling 5 per cent shares, capital up to Rs 75,000 crore can be raised. Further, up to 49 per cent of the shares can be sold, for which the law will have to be amended.
double edged sword
To an extent, a contradiction-like situation may arise in front of LIC. Like nationalized banks, LIC is considered safe and trusted by policyholders. LIC has 100% Sovereign Guarantee for the dues of its policyholders, which is one of the major reasons for its popularity and profitability. Although many private companies are known for providing better service to the customers.
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If LIC is privatized then this perception may change. The pressure to satisfy private shareholders would mean more emphasis on profits. As a private entity, there will be more pressure to remain competitive in other aspects. If, due to this, LIC becomes like other private companies, then it will be like a double-edged sword for them. Trying to be competitive and profitable may undermine its safety.
many questions will arise
Will it implement corporate governance and other rules like non-government companies? Will the government having more stake and control mean that it will continue to have significant influence over public policy and rules and even management style?
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Regulations and Guarantees
Even after the amendments made in 2021, the chairman will be appointed by the government. The same will be done in the case of every MD. Non-government shareholders will have a chance to choose one board member if they hold up to 10 per cent stake and two members if they hold more than 10 per cent. Clearly this is not enough and at least a policy should be announced on whether the control of the government will be reduced or lost. The good thing is that under the existing scheme, LIC may have to comply with both the norms and where SEBI’s requirements are complex, they must comply with them.
Section 37 of the LIC Act effectively gives a sovereign guarantee to the policyholders for their dues under the policy. The question arises that in the event of LIC being privatized, will the government continue to bear this responsibility?
Ideally, a cut-off date (perhaps linked to a percentage of the public holding) would be given and there would be no such guarantee for the liabilities of policyholders created after this date.
What will happen to the investment?
There are also questions regarding LIC investment. LIC has a major stake in other listed companies in the private sector. Will the policy of making, holding and voting such investments be influenced by public policy or will it work keeping in mind the interests of the investors. Section 21 of the LIC Act empowers the central government to give guidelines in respect of policies relating to public interest.
These issues will also arise in the case of other large proposed disinvestment/privatization. It is better to address these issues by moving forward.
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