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.

Magellan’s Calendar

In the September of 1519, a sailor called Ferdinand Magellan set sail to navigate around the globe. This was at a time when earth was believed to be flat and very few thought otherwise, even fewer were ready to prove this by planning an expedition to circumnavigate the earth. Magellan is widely credited to have successfully completed the expedition. Of course, the truth is Magellan died on the islands on the Philippine archipelago and only 18 of the 241-member crew made it back to Spain to prove that it is not possible to fall off the earth by sailing over the horizon.

The fleet of 5 ships and 241 sailors navigated the Atlantic via West Africa and the coast of Brazil. By the time the ships resupplied on the islands of the Strait of Magellan, one of the ships; Santiago was destroyed in a storm and the crew of another called San Antonio had mutinied and returned to Spain. The three remaining ships had entered the South Pacific Ocean in the November of 1520.

 The winds and waves vanished, and the sails dropped. The silent sea as the Pacific is called offered no help. Men succumbed to the tricks of the sea and fell overboard; the crew came into fire from pirates in the sea and native tribesmen on land.  Months passed, and there was no hospitable land to resupply. The commanders of the ships were getting edgy and the admiral foresaw more mutinies.

The admiral decided, the best way to keep the crew from losing their minds over the time passed was to hide the calendar. History records that the captains of the 3 remaining ships were given calendars made by the admiral and they along with the admiral decided what day it was. The Admiral maintained one calendar for himself and his first officers that showed the real date and another calendar for the crew that showed a false date – a date that changed slowly and kept the crew thinking days passed slower than weeks.

The crew eventually crossed the Pacific after 4 agonizing months of navigating through the Pacific and landed Guam in the Philippines sea. When Magellan and his officers revealed that they had spent 4 months navigating through the pacific, the crew was shocked beyond belief. Some felt betrayed, some said they had an inkling, but they didn’t care much now as they had finally made port.


The economic conditions in India are bad. It doesn’t take a genius to figure that out now. Economic indicators like the GDP numbers, agricultural income growth, manufacturing growth, employment rate and the aggregate demand in the economy are all declining and have been declining for quite some time now.

Although the decline and the collective decline is concerning, the real concern is that the central government of India is not acknowledging it. What we hear from government and government representatives is that FDI numbers have been the highest, the problem is because of the time bombs left behind by the previous governments or that these are effects of the trade war and other global factors.

Economists, one after the other have said that the slowdown is India’s own doing. Demonetization and the hasty implementation of a half-baked GST is being blamed for the current slowdown in the economy. When the BJP came into power in 2014 we were at a cyclical boom period along with a global fall in crude prices. Our government didn’t see it fit to pass on the advantage to the consumers and saved millions, where are those millions now?

2014 and 2015 were drought years for the agriculture of India and it had just seen a little recovery in 2016 when the government announced demonetization to kill the rural and other unorganized sectors. The government followed one blow after another by the hasty half-baked GST thereby taking care of what was left of the unorganized sectors.

The effects of these hasty and impulsive policies are having an effect now. One may say the financial crisis in Banks and NBFCs was a gift of the previous government, but sadly the numbers say otherwise. While the NPAs was at 2.5 Lakh crore in 2014 it has now come to 8.5 Lakh crores in 2019. Inaction from the current government is the reason for the snowballing of the banking crisis.

There are a lot of problems in our economy and all of them can be fixed. We are the nation that escaped from the meltdown in 1991, we are the nation that averted being part of the global crisis in 2008; so we can definitely find our way around these self-inflicted wounds. If only we have the stomach to accept that there is a crisis.

The finance minister gets defensive and starts shutting down reporters, the home minister is busy plotting booby traps for the opposition leaders and the prime minister is busy planning for his next item number.

I quoted the story of Magellan and his fake calendars because I am a hopeful person inside. I secretly want to believe that no government of India can be so arrogant about its ignorance. I sincerely hope that our central government is holding a Magellan’s calendar in front of us to keep our hearts and is maintaining a genuine calendar for itself that shows the truth.