LIC Act needs three amendments before insurer can be listed2 min read . Updated: 07 Feb 2020, 11:42 PM IST
- The proposed initial public offering of LIC will be preceded by amendments to Sections 24, 28 and 37 of the Act
- In 2018-19, LIC had generated a surplus of ₹53,214.41 crore and paid ₹2,611 crore as dividend to the government
Mumbai: Amendments to the Life Insurance Corporation Act, 1956, including changing the way the state-owned behemoth distributes its surpluses, will be key to the proposed public offer through which the government is looking to divest a part of its stake, said a senior LIC official, requesting anonymity.
The proposed initial public offering (IPO) of LIC will be preceded by amendments to Sections 24, 28 and 37 of the Act. Section 24 deals with the way the corporation handles its corpus, Section 28 is about dividend distribution and Section 37 provides government guarantee on all its policies.
“At present LIC pays 5% of the surplus to the government, while the remaining 95% goes to its policyholders. That needs to be relooked when the corporation gets listed and there is an external investor," the person said.
In comparison, private insurance companies pay 10% of their surplus to shareholders and the rest goes to policyholders. An industry expert, also requesting anonymity, said there was a possibility that the amendment could bring LIC on a par with other insurance companies, besides modifying the dividend distribution norms. “New shareholder(s) might want a bigger pie of the corporation’s dividend," he added.
In 2018-19, LIC generated a surplus of ₹53,214.41 crore and paid ₹2,611 crore as dividend to the government. In the previous financial year, it paid ₹2,430 crore of the total surplus of ₹48,444 crore to the government.
“We will also have to wait and watch what happens with the retention of government’s guarantee of the divested entity," the LIC official said. According to existing rules under Section 37 of the Act, “sums assured by all policies issued by the corporation including any bonuses declared in respect thereof...shall be guaranteed as to payment in cash by the central government".
On 3 February, minister of state for finance Anurag Thakur told Press Trust of India that the government will protect the interests of LIC policyholders, and the listing will help bring in greater transparency, public participation and help deepen the equity market.
“Government came out with the idea (of LIC listing). The details will follow and it will be in the interest of LIC and its policyholders. Interest of LIC and policyholders will be safeguarded," he added.
As of 30 November 2019, LIC’s market share stood at 76.28% in terms of the number of policies sold. It commanded 71% of the first-year premium. LIC’s net premium income for FY19 was ₹3.37 trillion, while net income from investments was ₹2.22 trillion.
The LIC official quoted above said that Section 24 of the Act also needs to be amended, but did not elaborate on this. The section explains how “the corporation shall have its own fund and all receipts of the corporation shall be credited thereto and all payments of the corporation shall be made therefrom".
Mint reported on Thursday that the government is likely to use part of the dividend payment from the Life Insurance Corporation of India to infuse capital into the insurer to prepare it for its planned IPO in 2019-20. LIC’s equity capital stands at ₹100 crore, which needs to be increased in order to sell even a 10% stake. “The paid-up equity capital of the corporation shall be one hundred crore of rupees provided by the central government after due appropriation made by Parliament by law for the purpose," says the LIC Act.