Mumbai: Finance minister Nirmala Sitharaman in the Budget 2020 has announced listing public sector behemoth Life Insurance Corporation of India on the bourses and privatising IDBI Bank.
The proceeds from LIC Initial Public Offering (IPO), IDBI stake sale along with current divestments in progress will help the government to achieve its aggressive disinvestment target of Rs 2.1 lakh crore and fiscal deficit targets. However one needs clarity on the sovereign guarantee that comes with LIC policy.
According to insurance experts, based on a high level of evaluation of LIC’s embedded value (future value of the new business), the insurer’s market capitalisation could be Rs 8 lakh crore to Rs 10 lakh crore, thus more valuable than TCS and Reliance Industries. Listing of LIC would also require amendments to the LIC Act 1956.
“Listing of LIC is a commendable measure provided there is clarity on the sovereign guarantee to policyholders and adherence to the required solvency margin is undertaken. Based on a very high level of evaluation of the Embedded value of LIC’s portfolio, the market capitalisation of LIC could be `8 lakh crore to `10 lakh crore,” said Ashvin Parekh managing director at Ashvin Parekh managing director at Ashvin Parekh Advisory Services.
“After two capital infusions, the government owns a substantial part of IDBI Bank (46.5 per cent stake) which will be completely sold off. The new investors will seek complete independance in putting the governance framework including independant directors, nominee directors. Also considering the quality of assets of IDBI Bank, it remains to be seen how much an investor will be expected to pay for the troubled bank," added Parekh.
“Discussion with respect to law ministry for legislative changes for LIC IPO has already begun,” said finance minister Nirmala Sitharaman at a press conference after presenting the Budget.
“Between LIC and IDBI Bank and other disinvestment as per guesstimates, Rs 90,000 crore could be raised. We will have to go back to parliament to get the nod for LIC stake sale….The government’s intention is to get out of IDBI Bank,” said Atanu Chakraborty (secretary) ministry of finance, Department of Economic Affairs.
“Listing of companies on stock exchanges discipline a company and provides access to financial markets and unlocks its value. It also gives opportunity for retail investors to participate in the wealth so created. The government now proposes to sell a part of its holding in LIC by way of Initial Public Offer (IPO),” said Sitharaman in her Budget speech.
Speaking about IDBI Bank, the finance minister said, “In the last few years, the government has taken concrete steps to bring our banking system to be robust. However, there is a need for greater private capital. Accordingly, it is proposed to sell the balance holding of Government of India IDBI Bank to private, retail and institutional investors through the stock exchange.”
Under Section 37 of The LIC Act, the government has guaranteed the sum assured with bonus in all LIC policies to ensure the availability of financial security to the family of the deceased. For the April to December 2019 period, LIC collected new premiums of Rs 1.37 lakh crore, showing a 45.5 percent year-on-year (YoY) rise, its market share was 71 per cent. LIC Annual Report 2018-19 showed that the income from investments stood at Rs 2.21 lakh crore at the end of FY19. It balance sheet is Rs 31 lakh crore.