LIC IPO: Even though the government may get unexpected profit from LIC’s IPO, but it has caused a lot of loss to someone. They are the policyholders of the “Participating Policies” of the Corporation. The participating policyholders are entitled to a share of the profits of the company. Actually, LIC has been giving a large part of its profit i.e. cash surplus as policyholders bonus, which will go on decreasing.
In this way the bonus to the policyholders will decrease
LIC in the draft prospectus filed on Sunday said that till the half year ended September 30, 2021, the surplus of LIC’s participating funds used to be allocated between policyholders and shareholders in the ratio of 95:5, but this ratio would change further. According to the draft paper, “In accordance with the accepted surplus distribution policy of the Corporation, the surplus linked to the participating fund is shared between the policyholders and shareholders in the ratio of 95:5 in FY 2022, 92.5:7 in FY 2023 and 2024 and From FY 2025 to 90:10 will be allotted.
LIC IPO: Can policyholders whose policy has lapsed also apply?
LIC Act had provision of 95% bonus
As per the original LIC Act, 95% of the profits generated by LIC every year should be distributed as bonus to the participating policyholders. However, as per an amendment to the Act in 2011, LIC is required to distribute at least 90 per cent of the surplus to policyholders’ funds (regardless of which business is generating surplus) before paying dividends to the shareholders of participating policies. should be given as a bonus. Thus, between 2012 and 2021, shareholders were entitled to a maximum of 10 per cent of the surplus from all businesses. However, LIC continued to give only 5 per cent of the surplus to the shareholders under its old distribution policy.
LIC IPO: Issue size may be in the range of Rs 53,500 crore to Rs 93,625 crore, possible price per share of Rs 1,693-2,962
New distribution policy will be heavy on policyholders
The new disbursement policy means that the pool of cash surplus to be given to the participating policyholders will further reduce. This is not only because of the new surplus distribution ratio, but also because of the division of the Consolidated Fund of the Corporation between the participating policyholders and the non-participating policy funds. Participating policyholders will now get the benefit of the profit pool only in their respective fund and not the entire pool as has been the case till now.
Shareholders will get the benefit of the entire surplus
In contrast, shareholders such as the government and the new shareholders after the completion of the offer for sale, will get the benefit of the entire surplus as compared to the policyholders fund.
The effect of this was that the embedded value of LIC increased almost 5 times to Rs 5,39,686 crore in September, 2021 from Rs 95,605 crore as of March, 2021. Due to this, the value of future profit increased from Rs 1.05 lakh crore to Rs 5.47 lakh crore during the same period.
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