Listing LIC could make its investments riskier

LIC is India’s biggest stock-market investor. Once listed, it might be tempted to increase its exposure to equities. We know what that did to India’s most popular mutual fund in the late 1990s. UTI’s US-64 collapsed because it had made too many risky investments. Most of 20 crore small investors never recovered investments

Aunindyo Chakravarty

A few years ago, I was part of a jury to select the best businesses in India for a prestigious award. Other than me, everyone else was a luminary — some from industry and others from the world of business journalism. Also, other than me, everyone else believed privatisation of government companies was desirable and that markets should be allowed to function unfettered.

There was one notable exception to this unanimous belief in the virtue of private enterprise, and that was LIC (Life Insurance Corporation). India’s government-owned insurance giant was the hands-down winner in the life insurance category. Everyone agreed that only the LIC could be trusted to pay up when one finally kicked the bucket.

Now, the Modi sarkar wants the LIC to dish out its biggest payout. Although the Finance Minister’s announcement, that the LIC will be listed on the stock markets, does not amount to an outright sale, yet it comes right after India’s Chief Economic Adviser extolled the virtues of privatisation in the Economic Survey. The government’s logic of selling LIC shares to the public is in line with that vision, that listing the company will bring more business discipline.

Does LIC really need to be more efficient? Since the insurance sector was opened up 20 years ago, private insurers have eaten into LIC’s erstwhile monopoly, but it still has over two-thirds of the insurance business. One reason Indians stick to the LIC is because it rejects only 1 per cent of the insurance claims filed per year, whereas private insurers reject 8 per cent on an average. The LIC also has a huge distribution network that reaches many more people than private players can.

Financial analysts argue that LIC’s cost structure is very high. For every Rs100 it invests, it spends an average of Rs4. So, even high-return investments leave very little on the table for policyholders. Those who back LIC’s listing say that share market norms will force the LIC to cut costs and increase profits, as it will be required to maximise value for its shareholders.

The question is whether profit maximisation is the only desirable objective for a corporation, especially in a developing country like India. The LIC provides insurance cover to 33 crore policyholders and provides employment to about 13 lakh people, including 11.3 lakh agents. That’s more jobs than what TCS, Infosys, Wipro and Reliance provide collectively.

Biggest fund source

The LIC is the biggest source of long-term funds for the government. At the end of the previous fiscal, LIC had a whopping Rs31.1 lakh crore in assets under management. Theoretically, that can fund the entire budget that Nirmala Sitharaman announced on February 1. LIC made a profit of Rs53,212 crore in 2018-19. That’s 34 per cent more than Reliance’s profits for the same year.

LIC’s corpus not only funds long-term infrastructure projects, it is also used to bail out PSUs that are in trouble, or are finding it tough to raise funds from the market. In 2012, when the then UPA government tried to sell 5 per cent stake in ONGC, at a floor price of Rs290 per share, no one was interested. Finally, LIC had to come in and buy 88 per cent of the shares that were on offer, to help the government meet its divestment target.

Similarly, last year, when IDBI Bank was in deep waters with 28 per cent of its loans going bad, LIC had to step in and take it over. It not only absorbed the bank’s troubles, but also ended up giving money to the government to meet its disinvestment target.

LIC’s funds are also used to maintain market sentiments. It is a standing joke in the stock markets that when the Sensex tanks in response to some government policy announcement, the LIC is nudged to buy up shares and prop up the key indices. The LIC is by far the single biggest domestic investor in Indian stocks, putting in between Rs55,000 crore and Rs65,000 crore into the markets every year. In fact, that is one of its biggest attractions for private players in the financial markets.

Insurance money is one of the secrets of Warren Buffet’s success as well. In 2004, Buffet wrote in his annual letter to shareholders that had he not bought National Indemnity, his first insurance company, in 1967, Berkshire Hathaway would have been “lucky to be worth half of what it is today”. The Oracle of Omaha has bought several other insurance companies since then, and even appeared on a TV commercial for one of them. Insurance companies have vast long-term funds, with steady premium flows. If they are run reasonably well, they not only generate profit, but also provide a huge pool of money that can be invested in various assets. Warren Buffet has been using the funds in the insurance companies he owns to invest in equities and even buy up profitable companies. It has made Berkshire Hathaway the legend that it is today.

What govt is aiming for

Of course, right now, private players will not be able to access LIC’s funds. The current aim is to raise about Rs90,000 crore from the markets. Since, LIC’s estimated market valuation is about Rs9-10 lakh crore, the Modi government will probably not have to sell more than 10 per cent of its stake to achieve its disinvestment target.

However, the government has also proposed to raise the minimum listing requirement for PSUs from 25 per cent public float to 35 per cent. This will require several follow-on public offers, over the next few years. Ultimately, like all listed companies, the LIC will also have to focus on quarterly results and maintaining its market capitalisation. This might force it to make riskier investments to increase its profits.

As I said earlier, the LIC is already India’s biggest stock-market investor. Once listed, it might be tempted to increase its exposure to equities to continue to appear efficient. We know what that did to India’s most popular mutual fund in the late 1990s. In 1998, UTI’s US-64 collapsed because it had made too many risky — and probably corrupt — equity investments. Even though the Vajpayee government infused bailout money, most of the 20 crore small investors never recovered their investments. This is a dangerous door that the government is opening right now.

Mainstream economists tell us that the market is the most efficient allocator of the long-term funds that insurance companies control. Even if that were true for developed capitalist economies, it certainly isn’t valid for developing countries like India, where a miniscule part of the population invests in the markets. In such a situation, opening up LIC’s funds to private investors will only end up directing investments to the benefit of India’s rich.

— The writer is a senior economic analyst