Money & Banking

Fitch Ratings: LIC listing will improve its accountability, rationalise investment decisions

Our Bureau Mumbai | Updated on February 26, 2020 Published on February 26, 2020

IPO will also benefit domestic insurance sector

The planned initial public offering in state-run Life Insurance Corporation of India will improve its accountability and transparency and also benefit the sector, rating agency Fitch said on Wednesday.

“Fitch believes that the benefits may trickle down to the entire domestic insurance industry in terms of attracting more foreign interest, which could result in an increase in foreign capital inflows into the industry. Fitch expects the IPO, once executed, may also encourage some of the other private sector insurance companies to list some of their shares in the stock market over the medium term, although the current insurance regulation does not require all insurers to be listed publicly,” Fitch Ratings said in a statement.

Finance Minister Nirmala Sitharaman had in Union Budget 2020-21 announced that state-owned behemoth LIC will go in for an IPO this fiscal. This will also help the Centre meet its highest-ever target from disinvestment proceeds at ₹2.1 lakh-crore.

LIC has a premium-based market share of almost 70 per cent in the life insurance sector.

Noting that a publicly-listed LIC will be subject to stringent disclosure requirements stipulated by the Securities and Exchange Board of India, Fitch Ratings said this will create a strong culture of compliance and accountability within the insurer.

“We think the insurer’s investment allocation decisions will be rationalised too, as major investment decisions could be subjected to additional scrutiny and approvals,” it further said.

In many cases, like that of IDBI Bank, LIC has taken special permission from the insurance regulator IRDAI to increase its stake beyond the regulatory ownership cap of 15 per cent.

“In addition, we believe that the proposed IPO, once executed, could broaden the insurer’s capital base and improve its regulatory capital position, which was 160 per cent at end-March 2019, slightly above the regulatory minimum of 150 per cent,” Fitch said.

The agency, however, noted that procedural and legal bottlenecks for amending certain sections of the LIC Act, conducting independent valuations and obtaining regulatory approvals could delay LIC’s listing beyond the target of March 2021.

However, once listed, the public float of LIC may have to be gradually increased to meet the minimum public holding requirement for listed companies.

Merger of state-run general insurance companies

Fitch is also optimistic that the long-pending proposal of merger of three state sector non-life insurance companies ― National Insurance Company, United India Insurance Company and Oriental Insurance Company, and their subsequent listing is likely to be completed this fiscal.

It also said that relaxing the 49 per cent foreign direct investment cap will attract more international companies into the rapidly-growing Indian market and promote competition, while positively contributing towards development of distribution networks and technology usage.

Published on February 26, 2020
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