Real challenge will be to get LIC prepared for the IPO

There was big hype over the proposed LIC IPO announced in Budget 2020. Before the LIC IPO becomes reality, there are 4 key shifts that are essential.

Sec 24 – Corpus Handling

Section 24 of the LIC Act deals with how the corpus of LIC will be handled. It is well known that LIC has an investment portfolio that runs into $500 billion and is the largest institutional investor in India by a margin. Sec 24 stipulates that LIC shall have its own fund and all the receipts shall be credited into that fund and all payments shall also be made out of that fund only. With the government divesting 10% stake, it is not clear as to who will control this fund. This could become a major bone of contention.

Sec 28 – Surplus distribution

This could be a slightly sticky affair for the government and for the investors that come in. Currently, Section 28 of the LIC Act stipulates that the insurer shall distribute 5% of its surplus each year to the government as dividend. However, most private insurers give away up to 10% to the shareholders and only retain the balance for the policyholders.  Any change to this ratio will require Section 28 of the LIC Act to be amended and will require approval of both the houses. Private investors may insist on amendment to this Section before even committing to invest in the LIC IPO; as it impacts their returns.

Sec 37 – State Guarantee

This would, perhaps, be the most controversial of the various provisions of the LIC Act that will have to be handled. Currently, every insurance policy issued by the LIC has an implicit guarantee of the government of India. That means; the policy claim will never be rejected on the grounds of capital inadequacy. That is the reason; LIC has been able to manage all these years with a paltry capital base of just Rs.100 crore. Clearly, if the guarantees of the state continue, then the government will expect special compensation and may also have to show that as a contingent liability in their budget. Alternatively, the capital base of LIC will have to be boosted adequately before the IPO.

Finally, the unique structure

Last but not the least, LIC has a unique structure of operation and that could pose another challenge. Employees and unions of LIC are already up in arms against the proposal to partially sell the stake in LIC. Then there are the LIC agents who have been integral to the growth of LIC over the last 60 years. They will ask for implicit guarantees that their roles will not be sidelined. Above all, the millions of policyholders of LIC account for close to 80% of the insurance market and they will need reassurance that their monies will continue to be safe. It will be a tough ask to handle these diverse forces.