The government of India has set an aggressive disinvestment target of ₹2.1 Trillion for the financial year of 2020-21. Most skeptics of this government believe that the government and its finance managers lack vision and don’t know what is the real objective behind this foolish obsession with disinvestment. But is it really a pointless obsession as some people think?
Last year, that is in FY20, the government made big decisions on disinvestment. The FM came out and gave us a list of government assets and enterprises from which it want to move away by disinvestment. BPCL was the biggest shocker in the list, a profit making company was to be sold, why? well, the government didn’t really feel it necessary to make the reason public but people speculated nevertheless.
This year, the government has it’s eye set of Life Insurance Corporation of India – LIC. The LIC came into existence in 1956 when the government of the day decided to consolidate life insurance companies and create one big state owned life insurance provider. A parliamentary legislation was passed and LIC came into being. LIC is one of the largest financial organisation in the nation and sits on a huge pile of cash. At the end of 2019, LIC has a total asset base of ₹30 trillion – that’s as much as our budgeted expenses for this year. LIC has a market share of 72% in the insurance sector, which means roughly 3 out of 4 people in India have insurance policies from LIC. Naturally everyone is skeptical when the GoI announced that it wants to sell out a little stake in LIC and make it a public company.
As I see it, the disinvestment from LIC has many dimensions. There are 4 main dimentions.
- The Government of India
- LIC as an Entity and its Employees
- LIC policy holders
- Public and the Future Stake holders of LIC
The Government of India
The humongous size of LIC and it’s assets and the Government of India’s total control over it meant that the GoI can direct LIC about how and where to spend its money. The money of LIC is used many times when the government wanted to disinvest from other PSUs . LIC also came to the aid of the government and chipped in from its huge kitty when the GoI wanted to invest in social and public works.
All governments in history have used LIC to bail our ailing Banks and other PSUs. LIC has also been a major market mover in our stock markets. Governments has leveraged LIC as a major investor to influence stock markets and all this was hidden from the general public of the nation. LIC by far is one of the most opaque organisations in the country today. No one knows where it invests or how much money it’s losing. We can only make a guess by looking at the share holding pattern of other public companies.
From what we’ve seen above, it appears the government has more to lose with this move. Going public would mean open scrutiny of the financial transactions. Will this restrict the government’s ability to use LIC for its financial needs? Not necessarily, the government has sold 20-30% stakes in many PSU banks, but still, a phone call from a big office in the government is enough to draw checks.
So we can conclude that the utility of the LIC for the GoI remains unchanged, just that the transactions will be public now. Again, when has public scrutiny scared any PSU bank managers? Can it be different for LIC? No likely.
LIC and its Employees
The employees of LIC staged a walk out on Tuesday the 4th of Feb and called for a nation wide where the 1.3 Lakh employee base would go on an indefinite strike. The employees are against the sale of 10% government stake via an IPO. The employees say that the LIC is the profit making company and has dominated the insurance sector despite privatization of the industry. The employees also say that the sovereign guarantee offered by the company on the LIC policies of the policy holders would not be in effect once the company is made public.
There has been no talks between the employee unions and the management of LIC yet. Market experts suspect that the employee displeasure is also stems from the fact that they would cease to be employees of a wholly state owned company.
As far as LIC as an entity is considered, going public would open it up for public scrutiny which will surely do good for the company. New stake holders would mean new objectives for the board – shareholder satisfaction. One needs to be careful and not expect too much. We all know that the state owned New India Assurance also underwent an IPO, a lukewarm reception and listing at a discount.
LIC Policy Holders
This people looking at the disinvestment move from this dimension. The view of the policy holder has grabbed most attention. What will happen to the policy holder’s money if the company goes bust? Now that the government’s stakes will go down and it will be a public company, the sovereign guarantee – assurance by the government – on the bonus will not be applicable. Hence the bonus is at risk and needs panic! well, not really. A 10% stake sale shouldn’t really mean all this. The company will remain the same from the perspective of the policy holder.
Skeptics however see this as a starting point and a precedent. A government of a later date may want more money and decide to sell some more of its stake and slowly lead to complete privatization of LIC. This is definitely not unheard of, but let’s not get that pessimistic just yet.
New Stake Holders
Finally, the new stake holders. What do they stand to gain or lose from this? Well for starters they will gain the privilege to have a closer peak into the books of LIC.
Secondly, if the LIC Act is amended in such a way to start treating it as any other public listed company. This way, by the provisions of the companies act, the minority share holders – which will most likely be banks, MF houses or retail investors will have rights to be heard and approve off any important decisions of the company. Does this make you feel powerful? Well.. let’s see about this.
Lastly, all PSUs pay dividends to the government from their surpluses. This can happen each year or whenever the central government is keen of getting a dividend. How are these dividends decided? how much? when? why etc etc was unseen in a non public LIC. This will or is likely to cease or atleast be reasonable once LIC goes public since the GoI will not be the only recipient of the dividends.
Looking at the four dimensions to this story, one gets a strong feeling that the Government of India will be the biggest loser by doing this. So why is the GoI doing this?
Please please please don’t tell me this is to meet the revenue expenditure. If it is.. then all the advantages mentioned above will mean nothing and mean that the government has indulged in yet another bout of sheer economic ignorance.