Why LIC disinvestment is a big, bold decision of Modi govt
Mother of all announcements is the IPO of LIC. LIC has net assets of more than Rs 31 Lakh crores and is way bigger than TCS and RIL in terms of market capitalisation may end up taking away liquidity from markets.
This also means the government will continue to have flamboyant investments and spending with equal focus on infra, reforms and fund through government premium holding disinvestments.
LIC also has a lot of investments in various listed companies and it is into insurance business which is earning a top line of approximately Rs 5.61 lakh crore with about 60% coming from individual insurance and group insurance schemes (Rs 2.3 lakh crore and Rs 0.98 Lakh crore for individual and group respectively).
This IPO should effectively attract FPIs and international investors which didn't happen well in case of similar big IPO Aramco globally. If that happens then it will be quite a successful strategy of the government to add a fresh infusion of funds in the economy by getting foreign investments as against taking away liquidity from the Indian markets.
The government will have to time and size to make the proposition attractive. None the less, LIC carries a brand and net profits at Rs. 2.6 lakh crore annually that are close to 10% size of overall government expenditure besides the state-run insurer holds a stake in 34 of 50 benchmark index companies.
LIC earned significant income from the dividend of about Rs 1.76 lakh crore in FY18. The economic impact and governmental decision to monetise and allocate this resource to fresh infrastructure development and fill budgetary deficit can be a historic decision taken for a long time addressing multiple aspects.
This will help the government ease a lot of economic parameters which it is struggling to achieve and target primary criteria being fiscal deficit. LIC as a performance and brand is so attractive at this stage that it can attract strong contenders for divestment subscription, especially when the insurance sector is slowly opening up in India, moving from monopoly to multiple players and therefore to untap its value timing is so right.
It will also provide lot of retail investors to participate in wealth creation journey of such a big institution which generates wealth through insurance premiums, investments incomes and appreciations of subsidiary and investments.
Coal India is a classic example where appreciation has been limited for retail investors primarily because of its size although it is nowhere comparable to LIC, which had generated higher supply with limited overseas participation.
The government was not able to complete its disinvestment target this fiscal due to subdued market conditions, lower valuations and potential lesser realisations in the backdrop of an overall slowdown and global recessionary trends, which will also be the consideration going forward to keep a watch on and a key determining factor in the success of LIC's IPO.
The good aspect is that the government is very clear about the ownership and control over the institution which it will retain hence there would not be much change in the functioning of the organisation and performance of LIC will be untouched due to this corporate event (IPO).
As against other PSU businesses which cannot maintain a steady business due to competition, disruption, management issues, are not able to update obsolete technology and are faced with a lack of product demand - these issues are not faced by LIC and it continues to have a robust demand and enjoys the largest market share.
It will also make stock exchanges quite broad-based and will change India's weightage and rating across various global indices including MSCI which is highly tracked globally.
When LIC started its operations in India, it was able to create trust in people to take insurance policies besides a large LIC agents distribution network including an attempt to have one agent every house.
This was phenomenal for India as a country else we could have seen any international player come and capture this space.
While the government divests its stake in LIC, it should also shoulder the responsibility of creating other huge profit-making companies with large market capitalisation, whose reserves can support the Indian economy for key investments and in times of distress as well.
These kind of businesses will be at the level of new-age digital companies such as Google, Microsoft, Apple and Intel etc. Currently, India is dependent on these global giants leading to a significant outgo of foreign reserves and profits.
This is predominantly on account of the government not being able to create such huge technology companies unlike China which has given focus and impetus to creating a few of such companies.
While the government has been broadly successful in exploring multiple avenues for divestment including the latest ETF route, however, in case of LIC, it will need to explore a big chunk of stake placement globally including placing the global sovereign funds not only due to its sheer size but the very attractiveness of LIC enables the cause.
By diluting its stake in LIC, the government is not necessarily diluting its voting rights in subsidiary and investee companies like NSE, ONGC, RIL, IOC, INFOSYS, Wipro, TCS etc and many others where it holds 12.2%, 9.4%, 6.58%, 6.51%, 5.8%, 4.8%,3.9% respectively, as it still will continue to control similar voting rights.
LIC also holds substantial stakes in various banks including heavyweight banks like SBI (9.8%), ICICI and axis bank with 10.3% each and a whopping 51% in IDBI Bank to get a substantial controlling majority.
Accordingly, such a unique and large portfolio with all creme de la creme is rare to get and I strongly believe that the government will find it more easier to divest barring the fact that it's sheer huge size will not allow exorbitant p/e multiples and valuations.
The government cannot afford to ignore ground-level outreach efforts that will be required to attract investors globally including sovereign funds, although LIC is in most favourite and evergreen insurance business of one of the richest wealth creators Warren Buffett.