The Indian economy has been passing through a turbulent time over the last few quarters. With a u0003 consecutive quarter de- growth, all eyes were set on the first Budget of NDA u008f . u0090 . With the Budget done and dusted, which added to tremendous amount of volatility in the financial markets with the headline indices going down almost u00a0 , u0090 u0090 u0090 points on the day of the Budget, followed by a gain of almost the same magnitude a couple of days later. However, one of the important points that the Budget presented was the disinvestment of LIC; thereby triggering the debate that by selling stake in the blue chip company of the Government is it like selling family silver or step in the right direction towards overall globalization.
Usually Central/ State Public Sector Enterprises, the Government undertakes disinvestment to reduce the fiscal burden and raise funds to control the fiscal deficit. The fiscal deficit is the gap between the Governmentu2019s earnings and expenditure. Some of the benefits of disinvestment are that it can be helpful in the long- term growth of the country; it allows the Government and even the company to reduce debt. Disinvestment allows a larger share of PSU ( Public Sector Undertakings) ownership in the open market, thereby adding depth to the capital markets in the country. Large part of the disinvested PSUs dominates stock market capitalization to a large extent. State owned enterprises have a large share of overall stock market capitalization, accounting for u008f u0003 % of MSCI EM Index and over . u0090 % of the market cap with large weights in utilities ( . . . . % ), energy ( . . . u00a0 % ), financials ( . . . . % ) and industrials ( . u0090 . u008f % ) u2014 and u008f . % of Schwab Fundamental EM Large Company ETF. Since u00a0 . . u0090 , disinvestment has been a prominent feature of successive Governments at the Centre.
u0192u00de Overall reduction of debt in public enterprises and overall balance sheet management.
u0192u00de Maintaining and promoting competition in the market and increasing overall corporate governance.
Disinvestment is a worldwide phenomenon and has been used by various nations for overall development leading to better infrastructure and better standard of living. A classic example is that of the Chinese Government along with other developing nations that have used the IPO route for disinvestment of large successful government enterprises.
Some of the largest public sector enterprises that have gone the IPO route are the likes of Agriculture Bank of China ( USD u008f u008f billion), ICBC ( USD u008f u008f billion), Bank of China ( USD u00a0 u00a0 billion), Rosneft ( USD u00a0 u00a0 billion), China Construction ( USD . billion), Electricite de France ( USD . billion), VTB Group ( USD u00a1 billion) and China State Construction Engineering ( USD . billion).
Large IPOs of SOEs ( Sate Owned Enterprises) in India such as Coal India ( USD u00a2 . u00a2 billion), ONGC ( USD u008f . u008f billion) and GIC ( USD u00a0 . u0003 billion) may look sub- optimal in the overall global context.
In u008f u0090 u00a0 . , the Government launched bond ETF Bharat Bond. There are two exchange- traded funds CPSE ETF and Bharat- u008f u008f ETF listed on domestic exchanges. The two state- owned insurance companies u2014 General Insurance Corporation of India and New India Assurance Co Ltd and u00a0 . public sector banks.
In case of the proposed disinvestment of LIC via the IPO route as per the Budget announcement, LIC is considered lender of last resort for the Government and has been the most active participant in the capital markets in India. The overall development to the debt as well as the equity markets in India has been largely due to LIC. In terms of net premiums - LIC collected around USD . u0090 billion is placed u00a0 . among the u008f . top global insurers and u008f u00a0 st on the basis of non- banking assets ( Global Insurance Market Trends, OECD u008f u0090 u00a0 . ) . On premiums written, LICu2019s is USD u00a0 u0090 u0090 billion less than top ranked United Health Group of the USA ( USD u00a0 . u0003 billion), and about USD . u0090 billion less than Ping AN of China ( . th rank). And in terms of non- banking assets, LIC is around USD . u0090 u0090 billion less than half of Allianzu2019s USD u00a0 trillion plus. China has listed all its four major insurance companies. China Life, the countryu2019s biggest insurer raised USD u00a2 billion in u008f u0090 u0090 u00a2 when the market was down; Ping AN made USD . billion in u008f u0090 u0090 . at its peak; China Pacific garnered USD u00a2 . u00a0 billion in u008f u0090 u0090 . ; and New China Life USD u00a0 . . billion in u008f u0090 u00a0 u00a0 . Premium written by Ping AN is double of LIC. LIC has a net profit at INR u008f . u0003 lakh crores annually that are close to u00a0 u0090 % size of overall Government expenditure besides the state- run insurer holds a stake in u00a2 . of . u0090 benchmark index companies and earned significant amount of dividend of almost INR u00a0 . u00a1 lakh crores.
One of the biggest strengths of LIC is the claim settlement ratio, which is compared to the global best in the insurance industry. u00a0 % rejections in terms of claim settlement compared to u00a1 % on Indian average. With a nationwide presence, LIC provides insurance cover to u00a2 u00a2 crore policyholders and provides employment to about u00a0 u00a2 lakh people, including u00a0 u00a0 . u00a2 lakh agents. With assets under management of INR u00a2 u008f lakh crores and a profit of INR . u00a2 , u008f u00a0 u008f crores in u008f u0090 u00a0 u00a1 - u00a0 . , LIC is the largest DII by virtue of investing in the range of INR . . , u0090 u0090 u0090 - u0003 . , u0090 u0090 u0090 crores annually in the stock market.
With an estimated market capitalization of INR . - u00a0 u0090 lakh crores, the Government would be looking at diluting u00a0 u0090 % , thereby raising INR . u0090 , u0090 u0090 u0090 - u00a0 u0090 u0090 , u0090 u0090 u0090 crores from the proposed disinvestment. LIC was established in u00a0 . . u0003 under a special Act thereby making it a company would be a long and tedious process and also would have to take exemption from SEBI for the minimum market float of u008f . % . LIC has reported total gross NPAs of around INR u00a2 u0090 , u0090 u0090 u0090 crores as on September u00a2 u0090 , u008f u0090 u00a0 . . The gross NPAs at u0003 . u00a0 u0090 % in September u008f u0090 u00a0 . have almost doubled over the last five years. The LIC always maintained a stable u00a0 . . - u008f % gross NPA. However due to the stress in the NBFC sector, the NPAs have gone very high in the last couple of years.
On a capital base of INR . crores, LICu2019s valuation surplus was INR . u00a2 , u008f u00a0 u00a0 . . u00a0 crores, Life Fund being INR u008f u00a1 , u008f u00a1 , u00a2 u008f u0090 . u00a0 u008f crores and asset under management being over INR u00a2 u00a0 , u00a0 u00a0 , u00a1 . . . u008f u00a1 crores at the end of F. Y. u008f u0090 u00a0 . , thereby making it one of the biggest disinvestment exercises in India so far.
In these turbulent economic times wherein boost to GDP is of prime importance, thereby pushing overall infrastructure development, the debate of disinvesting in the most valuable company like LIC is difficult to side.
However going by the global experience privatization of large enterprises has resulted in overall development of the organization and provided the much needed funds for the Government.
India has come a long way since liberalization and the biggest proposed IPO by the Government would definitely add depth to the capital markets. Without a doubt LIC is the finest and most reliable insurance companies in India and worldwide.
Farzan Ghadially is an Investment Banker by profession and a management faculty Send your feedback to farzan@ financekafunda. com The views expressed in this column are the individualu2019s and donu2019t represent those of the paper.
Maintaining fiscal discipline by disinvestment u2013 the economic paradox FINANCE KA FUNDA Farzan Ghadially disinvestment u2013 the economic paradox Disinvestment of companies like LIC u2013 Selling family silver or step to Globalization The recent announcement of disinvestment of Life Insurance Corporation has triggered the debate of whether it is selling of family silver or a step in the right direction for better Corporate Governance and overall Globalization
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