Taking Sides – LIC Disinvestment

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.

  1. The Government of India
  2. LIC as an Entity and its Employees
  3. LIC policy holders
  4. 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.

Why RBI held onto the status quo

The Reserve Bank of India decided to hold its rates in the Monetary Policy Committee meeting on the December 5 2019.

The reaction to this decision was well received by the analysts of the economy. But still, there was a group that expected the RBI to cut the rates.

Why did people expect the RBI to cut the rates?

We expected the RBI to cut rates because the state of the economy is far from showing any signs of recovery. The GDP growth is down, and there is no improvement in private investment either. By reducing the interest rates further the RBI and the government might’ve hoped to stimulate investment.

Why was no one shocked on the status quo of the interest rates?

We weren’t really shocked because even though it seemed like common sense to reduce the interest rates to stimulate investment, it somehow didn’t seem to work.

The RBI has reduced the repo rate 5 times already and there has been no significant effect on the economy or private investment.

Why hasn’t the rate cut made a difference?

It’s simply because of 2 main reasons,

1. Banks aren’t ready to pass on the benefit

With reduced interest rates, once would assume the commercial banks would reduced their lending rates and pass on some benefit to the consumers, but this didn’t happen. There are many reasons for this, the banks are already over streched with advances, the banks have mounting bad debts and fit because there aren’t enough quality borrowers inthe market.

2. Inflation is high

Due to an increase in fuel prices and food inflation, the WPI has increased to 4.9% which is well above the RBI’s target of 4%. Making further reductions would mean more money in the economy and hence trigger more price rise.

There is also a 3rd reason, since the economy isn’t that great, there is no need to invest right now in India. A rich investor who has easy and cheap access to funds in India would be tempted to borrow in India at a lower price and invest abroad. Already our foreign remittances are increasing, we don’t want to encourage further remittances do we?

Hence it makes perfect sense for the RBI to hold its rates.

But this leaves us with a site thumb. Who then will stimulate the economy? In 2011-12 when Pranab Da ended up over stimulating the economy, his only fault was just relying on the monetary policy and loosening it without care or concern.

Today we can’t rely on the monetary policy alone to get the economy back on track, we need the finance ministry to manage the fiscal policy and help revive the economy.

But now another question sticks out, does the government have any money left to do fiscal policy changes?

Where’s all the money gone? Why has GST failed? I guess that’s another blog.

The Fall of Trust

Somewhere in financial history, the word ‘trust’ got replaced by the word ‘credit’ which divided the economic chronology into After Credit and Before Credit. Even though credit was present from before agrarian economies, it was used in an organised manner by Europeans from the 15th century which in turn fueled their scientific as well as political conquests.

Credit which is trust in future boomed when the trust was kept or got fulfilled by advancement in economies, which in return again fueled credit growth. This cyclical growth excited man and he made the cycle circle faster at each turn by lending, spending and printing too much. Obviously this made the Europeans champions of the world and hence the first to go bankrupt.

In the 21st century their credit cycle broke all of a sudden, and they found themselves staring at negative returns on the credit facilities. This meant the number of trusted parties who can avail credit had declined, resulting in the need to shell out in order to find parties willing to accept credit. This happens because the trust factor in future has declined as the number of defaulting accounts rapidly balloon and even lead to sovereign countries defaulting on credit.

Italy was in crown position of having world’s highest ratio of bad debts. This crown position was challenged by a country in South East Asia where everything happens prematurely. That’s India. Even though India saw organised credit surge and became the economy’s backbone very late only in the 20th century, we are staring at huge bad debts which is around 9.5% of the total advances, where in Italy the bad debts are at 8.5% currently down from 17% in 2015. We are facing this high ratio of broken promises for last few years and we planned many things.

Now in 2019, the bad debts have changed their status from the ‘result’ to ‘cause’. We were talking about why it happened for last few years but now we are discussing what it will result from now on. The CEO of NITI Ayog, Amitabh Kant said that trust is missing in the economy which, as we’ve seen really means credit is missing from the economy. So where did the trust go? Since 2005, we saw boom years for trust where we saw credit was flowing seamlessly and investments were soaring. We added capacity in infrastructure like power plants, airports, ports and roadways. We invested heavily in industries and we created immense capacities. This was all made possible by the basic emotion of credit or trust in tomorrow, that tomorrow will be better than today. Indians were also sure that our more than enough population itself will provide the required demand and hence the cycle of trust will be safe. Alas it wasn’t.

The lack of reforms in the Banking and Finance Industry and the policy paralysis in the second term for the UPA government started the cracks in our cycle of trust.

In the first half of the 2010s, PSB asset books were ripe with more than 10% NPA’s, this led to a fall in their lending and their share in lending was taken over by NBFCs which got their boom years from the beginning of this decade. This boom bank rolled the initial years of NDA govt where no one knows actual growth rates. Introduction of fresh initiatives by NDA such as IBC brought fresh life to the trust in future. But just like as GST, the IBC was also introduced half baked, and as of now, number of cases pending more than 270 days which was the defined deadline to be decisioned is 400. It became another Judicial system of India.

Then came the ILFS balloon burst. This took away the single engine on which the economy was running – the NBFCs. Funds became costlier or rare for the NBFCs and hence for the end users. Now we are celebrating one year of NBFC crisis and economy shows the effects. As nobody is there to fund, the demand worsened and the auto sector’s fall was first omens of impending doom. All sectors started cost cutting and the already worse unemployment hit another spike which again affected aggregate demand. This eroded the trust in tomorrow. Only trust eroded, not the money with banks. As trust in the economy eroded people are less likely to invest in the market and hence this money will go to less risky fixed deposits.

Obviously for a less trusted tomorrow, credit is not favorable and hence needs the rate cuts to encourage people who can afford a credit at this time to come on board.

Making all this worse is the attitude of the government of the day. The government is either ignorant, lazy or just in plain denial about the crisis. The actions of the government are nothing less than blunders. Perhaps that will make the cut to the second episode of this series.