For LIC IPO to succeed, the life insurance giant has to dump a lot of sick stocks

• Nearly ₹85 of every ₹100 rupees invested by LIC is either government companies or government securities like bonds.
  
  
• In 2010, LIC had to shell out ₹11,500 crore to buy government’s shares of REC, NMDC, and NTPC because other investors weren’t forthcoming.
  
  
• LIC also owns stake in sick state-owned companies like MTNL and SAIL.

The Life Insurance Corporation has bailed the Indian government out many times over the years. But it may not be able to do so, as freely, after the IPO proposed by the Finance Minister Nirmala Sitharaman in her budget speech.

If LIC gets disciplined, as promised by the Finance Minister, and plays by the rules of the market, top politicians will not be able to arm twist the insurance giant to bail out the government as and when needed.

By December, it’s stock market investments were at ₹31 lakh crore. But nearly 85 of every 100 rupees invested in the market is either government companies or government securities like bonds etc. This portfolio of shares in public sector enterprises has accumulated through multiple bailouts over the years from IPOs to FPOs. In fact, LIC was always the last investor on an IPO date to save face many times after a state-owned company failed to enthuse investors.

LIC - the saviour of the state






In 2010, LIC had to shell out ₹11,500 crore to buy government’s shares of REC, NMDC, and NTPC because other investors weren’t forthcoming. Then the Congress-led government had to rely on LIC to buy the shares of ONGC after a tepid market response to its FPO.

The story repeated many times in the next few years. But its biggest contribution was with GIC in 2017 where LIC bought three fourths of the shares offered by the government to the market. In 2018 too, it had to buy 70% of the offer by Hindustan Aeronautics. In fact, LIC also owns stake in sick state-owned companies like MTNL and SAIL.

LIC could have been the saviour for many more listed state owned companies, but the Modi government has decided to sell the golden goose itself. LIC is also famous for investing millions whenever stock market tanks, just to prop it up. But once it is listed in the market, these tricks will be impossible to execute. The disclosures will lead to a lot of discontent.



Banking on state owned banks

There is another part of the problem arising from the number of times LIC has been forced to invest in companies that many others won’t touch with a barge pole. The investments in many loss-making companies, public-sector banks in trouble, will also weigh on the valuation of LIC.

LIC owns stake in 21 state-owned banks, 11 of which are buried in bad loans and are under RBI-monitored clean up. If the government wants to get the best price for the shares of LIC, the insurance giant may have to offload the thousands of shares of different companies in the next few months.

When shares are sold in bulk, it can drag those individual stocks into an abyss, and dent market sentiment severely. On the flip side, LIC may truly get cleaned up in the process and that is good news for the millions of policy holders in the country.

The company’s books and operations have been opaque for far too long but it is trusted by 250 million policyholders. If it has to toe the market regulations, and focuses on its business alone, it has the potential to be at par with some of the world’s biggest insurers.

In spite of its forced investments, LIC's deep coffers and wide portfolio has landed it with sizeable profits. Last December, it booked profit worth ₹14,000 crore - making it an attractive company for possible investors.

Wetting the beak

As economist Shankar Aiyar recently argued, LIC can even evolve into a bank like many of its global peers like Axa, Berkshire, and Munich Re. But even after the listing, investors must remember that the LIC stock will still be controlled by the Indian government. And, it will continue to exercise some amount of control.

So, investors in LIC might face what those of PSU banks do – be a part of poor governance, bad decisions -- despite controlling 70% of the country’s banking system. As the numbers show, the market value of one private entity, HDFC Bank, is more than all the listed government banks put together.

A cleaner LIC, accountable to private investors instead of the government, is good for many. A government that is addicted to wetting its beak into the insurer’s kitty year after year is unlikely to let go of the habit just because it is now listed on the stock exchanges.


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The biggest IPO of the next financial year ⁠— LIC, whose corpus is at ₹31 lakh crore