Before IPO, Government Must Ringfence LIC From Its Own Future Follies

The government needs to ringfence the Life Insurance Corporation of India (LIC), whose initial public offering (IPO) of 31.6 crore shares will happen before March-end, to prevent the diamond in its portfolio from being reduced to charcoal. The last diamond it had listed, our near-monopoly coal producer Coal India, had its IPO in 2010. Today, its market valuation is just over Rs 1 lakh crore, one-third of its peak in 2015, and just over two-thirds its initial issue price.

Of course, Coal India has been liberal in dividends, but this too has been the result of the government demanding high payouts in order to fill its coffers. If this money had been invested in expansion or overseas acquisitions, Coal India would have remained a diamond, and not just a plain-vanilla coal producer. We must thank our lucky stars that Coal India is still not ashes.

The problem is that the government has a “Sadim touch”, which is the opposite of the Midas touch. Whatever it touches, even its crown jewels, sooner or later turns to ashes. LIC is the crown jewel to beat other state-owned crown jewels, and if the government wants to keep it that way, it has to protect India’s largest life insurer from its own Sadim touch and future follies.

The problem arises from two simple realities:

One, as the overwhelming owner of 95 per cent of LIC even after the IPO, the babus in North Block may tend to treat it as their own pet golden goose, to be cut open whenever required. In the past, this is exactly what happened under all governments. When Pranab Mukherjee as Finance Minister could not get the market to buy ONGC shares, the LIC and other state institutions were forced to pick up the tab.

When the Narendra Modi government wanted to raise money from disinvestment, it offered IDBI Bank to LIC as a strategic divestment. Now. Of course, IDBI Bank may still be divested, both by government and LIC, but the point is the temptation. In the past, and especially during the UPA regime, when banks needed more capital, LIC was where these shares were parked. LIC is probably one of the biggest owners of nationalised bank shares even now.

Two, a 5 per cent post-IPO public shareholding does not necessarily improve governance, just as it did not in any of the scores of public sector companies that got listed before LIC.

LIC is very, very important for corporate governance in general for two more reasons:

#1: It is the single largest equity owner in the country, with an equity investment portfolio worth nearly $128 billion (over Rs 9.6 lakh crore at current exchange rates). This is more than twice the valuation of the country’s biggest bank (State Bank of India), with only two private companies (Reliance and Tata Consultancy) having market values higher than LIC’s equity portfolio, which too is only a small part of overall policyholders’ investments.

The key to LIC’s future success depends on how much LIC not only grows this value, but also how it conducts its own business on commercial lines in future. Its investment managers must be allowed to always make their own commercial calls, and not listen to what is whispered in their ears from North Block.

#2: With massive investments in 35 large cap private companies and an overall investment universe of 370 and-odd companies, LIC has a significant say in how these companies are run. While it may not be directly on most corporate boards, as a very large investor accounting for 3.6 per cent of India’s total stock market capitalisation (read some details in a Bloomberg report here), no management can ignore what the LIC thinks of its governance. It follows that LIC cannot preach governance if it itself is not well governed.

#3: If LIC’s shares tank post-listing, it will be a disaster for public confidence in public sector IPOs. It thus makes some sense for the IPO to be priced below market expectations, so that some money is left on the table for retail and other investors. Also, nothing will damage the keen interest shown by high-net-worth investors than to see a 95 per cent owner use LIC as a receptacle for all its failed public sector IPOs, or as a source of distress funding for the exchequer.

This is why LIC needs to be ring-fenced from government interference. One way to do it would be to create a separate holding company with independent managers who are not part of the government structure. Any policy-related instructions to the LIC board from its biggest shareholder will then have to go through this independent board and not directly to the LIC executive management. The government should be barred from influencing decisions at LIC except when routed through this professional oversight board.

Unlike Air India, which the government literally had to beg to get its privatised, or even Coal India, which is now a pale shadow of its pre-listing self, the government cannot afford to screw up on LIC. It is simply too important for Finance Ministry babus and politicians to mess around with.