Amir Ullah Khan and Madhav Malhotra
Disinvestment of India’s largest insurer LIC has been the claim to fame for several months now. The initial public offering (IPO) of Life Insurance Corporation (LIC) is expected to be the biggest ever in the country’s history, which was announced by the finance minister Nirmala Sitharaman in the 2021 Union Budget and was expected to occur in 2022. However, this IPO kept getting delayed for various reasons and has now been pushed in a hurry just when the Ukraine war is going on, inflation is at its highest and the stock market at its lowest in recent times.
Coming at a time when the macroeconomic fundamentals are weak and when the RBI itself is announcing serious worries on growth prospects, the LIC disinvestment and IPO comes across as a desperate move by a government going broke. There are coal shortages and electricity cuts in peak summer and this is not a great advertisement for an emerging economy and a global superpower anyway. The banking and insurance sector are the backbone of the economy and any signal that goes wrong with these two sectors could cause great damage to growth and investment prospects.
The decision to go in for this disinvestment itself was highly questionable. While it is true that the government has been facing very high deficits over the last few years and been financing the same through incessant disinvestments, the LIC case is indeed a difficult one to understand. While the delay in March 2022 itself has caused embarrassment due to the failure to meet disinvestment targets for the past financial year, the IPO while markets crash everywhere is adding to the pitiable manner in which this is being rushed through. It is still not clear, for example on why the LIC issue size has been slashed by 5% to 3.5% of the total equity of the company.
The Government has a disinvestment target of Rs 65,000 crore for the current financial year 2022-23, according to the Union Budget documents. In the financial year 2021-22, the disinvestment target was Rs 1.75 lakh crore. Out of which only Rs 78,000 crore could be achieved, with a shortfall of 55.4 per cent. The Air India sale itself was fraught with so much of uncertainty and indecision. When it finally happened, no one and not even those who have been arguing for privatising a huge loss making entity, appeared satisfied at the outcome
LIC opened its IPO to the public on May 4, and the process concludes on May 9. Through this IPO, the Government is now aiming to raise ₹21,000 crore, as opposed to raising between ₹65,000 crore and ₹70,000 crore by diluting 5% equity earlier, indicating more than a 50% compromise on valuation. As per the IPO price band for 3.5% stakes for Rs. 21,000 crore, the valuation comes to around Rs 6 lakh crore. The price band is fixed at ₹902 to ₹949 per equity share, announcing ₹60 discount to the policyholders and ₹45 discount to LIC employees applying for the public issue.
What is the reason behind this sale? Is it for financing the budget deficits? Or is the objective of this IPO to enhance the brand image & provide a public market for the equity shares by listing them on the stock exchange. It is argued that this would also act as a profitable opportunity for retail investors. This large scale offering of LIC’s ownership is being referred to as “India’s Aramco moment”, which is similar in importance and scale to the Saudi Aramco IPO of 2019.
The Finance Minister recently admitted that the Government is going ahead with IPO but is wary of the market conditions since it is not conducive with the ongoing Russia- Ukraine conflict. With the issue of LIC Draft Red Herring Prospectus (DRHP) and the response it received, the Government has decided to go ahead with the IPO. Despite the hype around the issue, people are wary as they see the LIC as a government owned institution that is often called upon to rescue inefficient public sector and sometimes even the inefficient private sector. The LIC was in fact directed to bail out the IDFC bank.
At a time when the economy is sliding at a rapid pace, the LIC story stands out as yet another exercise in vain. With unemployment at its highest, work force participation plummeting and manufacturing now hostage to stagnant market conditions, such exercises can only be futile and achieve none of the desired objectives. We should have learnt from the colossal failure of a similar lofty and vague demonetisation exercise that knocked the wind out of a bustling economy that will take years to recover from the policy shock of November 2016.
Amir Ullah Khan and Madhav Malhotra are associated with the Hyderabad-based Centre for Development Policy and Practice
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