Finance Minister Nirmala Sitharaman announced in her Budget 2020 speech that the government will sell a part of its holding in Life Insurance Corporation of India (LIC) through an initial public offering (IPO).
- The Parliament of India passed the Life Insurance of India Act on 19 June 1956 creating the Life Insurance Corporation of India, which started operating in September of that year.
- It consolidated the business of 245 private life insurers and other entities offering life insurance services.
India’s largest financial institution
- LIC has total assets of 31 trillion rupees (~31 lakh crore OR $434 billion).
- LIC has 1,11,979 employees and ~12 lakh agents.
- Profit of Rs 48,444 crore for FY2018
- 76% market share in Insurance sector.
- Monopoly till 2000.
What sets the LIC apart from other insurers?
- The government owns 100% of LIC.
- It is the only insurer offering sovereign guarantee meaning that the policyholders funds are completely secure.
- This is the reason that LIC policy premiums are higher than private sector counterparts.
What is an IPO?
- An initial public offering (IPO) refers to the process of offering shares of a private* corporation to the public in a new stock issuance.
- Public share issuance allows a company to raise capital from public investors.
- LIC’s stake sale is likely to be under 10%
LIC Disinvestment Possible delays
- LIC was set up under a special act in 1956.
- Hence the government will have to amend the law, a process that may delay the sale beyond March 2021
- An inter-ministerial committee will be set up to decide on the roadmap and extent of disinvestment.
- Target is to bring the IPO by second half of FY 2020-21.
Aggressive disinvestment
- The govt has targeted an aggressive disinvestment programme.
- The government has set an ambitious target of ₹2.1 trillion(2.1 lakh crore) for the sale of government holding in state-run companies .
- It includes ₹90,000 crore to be raised from an IPO in LIC and a stake sale in IDBI Bank.
- The aggressive stake sale plan comes against the backdrop of declining tax collections and a sharp deceleration in the economy
Why haven’t the earlier governments done so (sold stake in LIC)?
- LIC has been used as an investor of last resort in the past to support the markets by buying shares of state-run companies.
- It also bought shares of state-owned companies during divestment and when investor participation was weak.($1.4 billion in ONGC IPO).
- It was also called in to bail out IDBI Bank, which had been severely hit because of bad loans in 2018.(~10,000 crore).
- LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
- In FY19, LIC invested around Rs 68,620 crore into the equity market.
- It also provides funding for many infrastructure projects – Rs 3,76,097 crore as of March 2018.
Largest Indian Company on Share Market ?
- LIC owns double-digit stakes in several publicly traded firms, including Bharat Heavy Electricals Ltd. and Larsen & Toubro Ltd., that are collectively worth more than $80 billion.
- If LIC shares are listed on stock exchanges, it could easily emerge as the country’s top listed company in terms of market valuation.
Top 10 Largest Indian Company
| Company Name | Last Price | % Chg | 52 wk High |
52 wk Low |
Market Cap (Rs. cr) |
|---|---|---|---|---|---|
| Reliance | 1,425.85 | 2.89 | 1,617.80 | 1,095.65 | 903,875.34 |
| TCS | 2,107.70 | 0.22 | 2,290.65 | 1,882.00 | 790,890.12 |
| HDFC Bank | 1,229.25 | 3.04 | 1,304.10 | 1,035.13 | 673,263.55 |
| HUL | 2,155.00 | -1.08 | 2,195.00 | 1,649.70 | 466,517.00 |
| HDFC | 2,345.70 | 3.76 | 2,499.65 | 1,821.55 | 405,578.02 |
| ICICI Bank | 530.90 | 2.97 | 552.40 | 336.25 | 343,458.00 |
| Infosys | 787.85 | 2.69 | 847.40 | 615.00 | 335,509.70 |
| Kotak Mahindra | 1,698.00 | 1.23 | 1,734.35 | 1,209.50 | 324,493.74 |
| Bharti Airtel | 519.10 | 1.72 | 527.20 | 269.25 | 283,197.98 |
| SBI | 306.25 | 2.77 | 373.70 | 244.35 | 273,316.23 |
World’s largest company
- Saudi Aramco, Saudi Arabia’s state owned oil company brought its IPO in December 019.
- It raised about $30 billion in the world’s biggest-ever initial public offering.
- It soon overtook Microsoft Corp. and Apple Inc. as the most valuable listed company.
Benefits of LIC going public
- The government is expecting over ₹70,000 crore from the sale of an undisclosed stake in LIC.
- Listing of companies on stock exchanges disciplines a company and provides access to financial markets and unlocks its value.
- It also gives opportunity for retail investors to participate in the wealth so created.
- Unlike unit-linked insurance plan (Ulip) investors, who have a clear visibility on the daily performance of underlying funds, the endowment policyholders’ visibility is limited to annually declared bonuses.
- Public listing of LIC will lead to more disclosures of investment and loan portfolios and better governance, with greater transparency and accountability.
- Listing will allow analysts to monitor LIC’s governance.