Mumbai: The government is likely to use part of its dividend from the Life Insurance Corporation of India (LIC) to infuse capital into the insurer and prepare it for its planned initial public offering (IPO), said two people aware of the development.
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," according to LIC Act.
According to one of the two people cited above, the insurer pays 95% of its surplus to policyholders and the rest to the government. “The extra capital required for the IPO will likely come from the government’s portion of the surplus as the policyholders’ money will be left untouched," said the person.
In FY19, LIC generated a surplus of ₹53,214.41 crore and paid ₹2,611 crore as dividend to the government. In FY18, it generated a surplus of ₹48,444 crore and paid ₹2,430 crore to the government.
The second person cited earlier said that while the amount of additional capital requirement will depend on its valuation, ₹100 crore seemed insufficient.
“Using the proceeds from the government’s dividend seems to be the most logical thing to do at the moment, although the modalities needed to be worked out," said the second person.
LIC had a market share of 76.28% in terms of the number of policies sold, and 71% of first-year premium as on 30 November 2019. Its net premium income for FY19 stood at ₹3.37 trillion, while net income from investments stood at ₹2.22 trillion.
The total value of LIC’s equity investments in FY19 was ₹28.32 trillion (94.9% of its total investments), with another ₹1.17 trillion and ₹34,849.37 crore in loans and money market investments, respectively. Industry experts believe the stake sale will not only allow the government to meet its revised fiscal deficit target, but also draw more foreign investments into India.
Mint reported on 3 February that the government is unlikely to sell more than 10% as the market may not be able to absorb it. Based on the government’s disinvestment target, the LIC stake sale could be valued at more than ₹70,000 crore. It owns 100% in the country’s largest insurer.
Analysts, however, believe that a 10% stake sale will be difficult for the market to absorb since LIC’s valuation is expected to be at ₹8-10 trillion.