The government’s proposal to list Life Insurance Corp. of India(LIC) through an initial public offering (IPO) was a highlight of Saturday’s budget. But it could be a complicated exercise. This is both because of LIC’s heft and the special status it enjoys in the country’s financial structure. Even after having lost its domestic monopoly nearly two decades ago, the state-owned insurer dominates the domestic market for life insurance, collecting premiums that are more than twice those mopped up by private insurers every year. For success, an insurer needs to command the trust of people that it will honour its commitments decades into the future, and LIC retains its allure as a brand expected not to let policyholders down. All this should translate into a valuation so high that its market capitalization once listed could beat that of all other companies traded on the Indian stock exchanges. By conservative estimates, selling even a small fraction of LIC shares could draw several times more money into New Delhi’s coffers than the biggest listing of a state-owned enterprise so far, that of Coal India Ltd. The scale of the LIC offering could crowd out investor interest in other state-run companies lined up for stake sales by the government next fiscal year. This places a premium on the offer’s timing. Go too early, and subsequent sales may run into low investor appetite. Go too late, and investible funds may already have got sucked out.
Since LIC is a corporation, it will need to convert itself into a company before it can list. While listing rules set a minimum proportion of stock that must be floated at 10%, LIC may get an okay for a smaller sell-off. In any case, its policyholders enjoy a sovereign guarantee that allows its paid-up capital to be far below the threshold set for the industry. It is also permitted to invest in securities that are out of bounds for rival insurers. Some parts of its investment portfolio do not meet rating standards either. Its governance and disclosure requirements are at variance with what the stock market is accustomed to. At the government’s behest, it has also made direct investments. It even owns a bank. Clearly, a lot of operational norms will have to be changed before some of LIC’s ownership can be turned over to investors at large. Else, regulatory forbearance will have to be sought. A clutch of waivers from the banking and insurance regulators were needed for it to acquire the ailing IDBI Bank. This time, exemptions may not be enough. Legislative changes may be required, too.
In the main, though, LIC’s listing will deepen both the stock market and the insurance industry. The appeal of its policies has ridden to an extent on the bulk of profits that it shares with policyholders as “bonus" handouts. Shareholders will now expect dividends, but market scrutiny would also push it to achieve efficiency, so its bonus record could still improve. This is the government’s most significant sale of shares ever, and should be done well. If pulled off properly, it would signal a definitive commitment to disinvestment. It may be prudent to sell shares in batches, rather than a chunk in a single go. The time could be used to rationalize its investment portfolio, ridding it of dead weights, orienting operations to the discipline of quarterly performance, and adapting it to the digital age. Millions of policyholders would expect LIC to go about it safely and steadily.