Some are calling it India’s Saudi Aramco. A listing on Indian stock exchanges like none other. As India’s government looks to divest about 10 per cent ownership in the insurance behemoth through an initial public offering, Life Insurance Corporation of India (LIC) is all set to see a significant disruption. The scale of that disruption would be unprecedented within the organisation and outside.
The internal disruption would mean changing the way it works. It means a lot in terms of bringing in professionalism, adhering to stringent disclosure standards for business processes and financials that are followed by all insurance companies in India and abroad, aggressive use of technology and better use of human and financial resources.
LIC is a government of India undertaking set up under the LIC of India Act, 1956. It is currently 100 per cent owned by the government. The monsoon session of the parliament would have to amend the Act to allow changes. LIC officials identified two key sections that need an amendment. These include Section 24 that deals with LIC’s own funds. The other is Section 37 that allows the government to guarantee policies and payments made to you as an insured person. As a listed company like any other insurance company, LIC should ideally pay for all liabilities through its assets.
In the next set of actions, the parliament would have to clear the path bypassing amendments to the LIC Act, 1956. There is a good chance of resistance against the government move. The existing staff of over 1,08,000 people may face pressure. Employees’ unions are already resisting the disinvestment move. However, the argument is that the government will continue to own 90 per cent stake. There are many public sector undertakings where the government owns only 51 per cent stake or less.
External impact
There could be a significant shake-up in financial markets as a result of the listing of the LIC of India. To put things in perspective, LIC sells three out of every four life insurance policies sold in the country. With a market share like that, everyone would scramble to own the slice of the LIC pie. An insurance company’s performance is measured by the value of the new business it generates, the rate of growth of that new business, operating expenses to generate that new business and persistency ratio. The last term refers to the renewal of insurance premium in the 13th month or a year after selling a new policy. In a release last week, LIC reported 17.5 per cent growth in the value of the new business. Private insurers in India like HDFC Life, SBI Life and ICICI Pru Life are growing faster than LIC due to their small size. In the new avatar, LIC would have to benchmark itself against private insurers and global insurance giants like
China Life or AIA
The market value of most insurers is determined based on the ‘multiple’ investors give to the expected new business generated. Private insurance companies in India are trading at 30-40 times the value of the new business they are expected to generate. Even if one assigns half the ‘multiple’ to the expected new business that LIC would generate next year, the anticipated market value of LIC would be close to Rs 10,00,000 crore. The government’s stake of 10 per cent that they would offload would be around Rs 1,00,000 crore. The disinvestment target for 2020-21 set in budget estimates is Rs 2,10,000 crore and includes the LIC divestment. Reliance Industries, the most valuable company currently, has a market capitalisation of Rs 9,00,000 crore.
From a personal finance standpoint, if you are a policyholder of LIC, you do not have to worry. You can expect better service and efficiency from the insurance giant. From an investment standpoint, you can look forward to the IPO later this year. Despite selling 29 crore policies since inception, LIC officials admit that India’s insurance market remains under-penetrated. There is potential for the insurance industry to grow at a faster clip. It is perhaps the most transformational event not just in the insurance sector but also in India’s capital markets.
(The writer is editor-in-chief at www.moneyminute.in)