Listing a leviathan

As a career investment banker, Uday Kotak knows the significance of timing when a company makes its market debut. His advice that the Centre act now to dilute its stake in the Life Insurance Corporation of India (LIC) and list it on the exchanges deserves to be heeded. It is not only the buoyant market mood that calls for taking the insurance leviathan public. There are other and arguably more compelling reasons.

LIC is one of the most valuable firms in the public sector space and its market position today is as strong as it has ever been. Despite competition from two dozen private life insurers, LIC has retained a firm grip on the market, with a 73 per cent share of premiums collected and an 83 per cent share of policies sold. It towers over private players on critical parameters such as the claims settlement ratio (97.7 per cent), ability to retain policyholders and distribution reach (11 lakh agents). These factors alone guarantee an excellent response to an LIC IPO from both retail and institutional investors. Once listed, LIC will have the freedom to tap the markets to fund its growth. Presently, it is wholly dependent on a cash-strapped Centre. Finally, taking LIC public will also speed up its long-overdue corporatisation. Greater accountability on its investment decisions, better accounting and risk management systems, and more detailed portfolio disclosures will benefit its policyholders. Today, LIC’s status as a government entity exempts it from prudential investment norms applicable to private insurers and prevents independent decision-making. Consider the number of times it has been called upon in the last three years to bail out divestment offers, recapitalise public sector banks and participate in complex budget-boosting manoeuvres. Reducing the Centre’s interference in LIC’s workings and improving its public disclosures should reassure policyholders that its investment decisions are indeed made in their best interests. With 27 crore individual investors and an investment kitty of over ₹14 lakh crore (last annual report), LIC is by far the largest domestic institution and its operations cannot be conducted in a black box closed to public scrutiny.

Detractors may argue that diluting the government stake in LIC will dent its popularity with investors. Well, this is easily resolved by the Centre divesting some of its shares in LIC while retaining majority ownership; after all, listing hasn’t hurt depositor confidence in public sector banks such as the SBI. As to whether LIC should continue to enjoy a sovereign guarantee for all its policies, this is an academic debate. Whether or not the Government explicitly extends a guarantee, the Indian public will certainly infer it. In any case, LIC, irrespective of whether or not it is listed, is too big a player in the Indian financial system to be allowed to fail.

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