Capital Markets: Challenges and Developments

Back in news: LIC Disinvestment

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Life Insurance Corporation of India (LIC)

Mains level : Disinvestment in India

The Union government has filed a draft document with the stock market regulator for selling 5% of its shares in the Life Insurance Corporation (LIC) of India.

Details of the IPO

  • The IPO is a 100% OFS [offer for sale] by the Government of India and entails no fresh issue of shares by LIC.
  • 6 Crore shares are on offer representing 5% of the government’s equity in the firm.
  • As much as 10% of the offer could be reserved for LIC policyholders, as per the regulatory filing, and another 5% of the shares may be reserved for employees.

About Life Insurance Corporation of India (LIC)

  • LIC is an Indian state-owned insurance group and investment corporation owned by the Government of India.
  • It was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India.
  • Over 245 insurance companies and provident societies were merged to create the state-owned LIC.

Why LIC?

  • LIC is India’s largest financial institution.
  • When listed on stock exchanges, it could easily emerge as the country’s top listed company in terms of market valuation, overtaking current leaders Reliance and TCS.
  • It is also the largest investor in government securities and stock markets every year.
  • On average, LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
  • LIC also has huge investments in debentures and bonds besides providing funding for many infrastructure projects.

Impacts of listing of LICs

  • Profit-making for govt: The government is trying to make the most of the brand value of LIC, given that it is one of the few remaining profit-making entities owned by the state.
  • Better returns: Listing will boost LIC’s efficiency and thereby policy returns.
  • Reforming the insurance sector: LIC will also become more competitive. This will put pressure on its peers to innovate, benefitting policyholders in terms of pricing, product features, and services.
  • Better financial position: Less govt interference will be a positive for LIC’s financial health.
  • Risk-free: As long as a sovereign guarantee over the maturity proceeds and the sum assured to continue, policyholders won’t perceive any risk.

Various challenges

  • Structural challenges: LIC can even evolve into a bank like many of its global peers like Axa, Berkshire, and Munich Re.
  • Market hurdles: LIC’s own issues are not the only challenge the company would face in going public. It also remains to be seen if the Indian share market is ready to absorb such a large public issue.
  • Impact on growth: The size of the IPO will determine the extent of liquidity it will suck out, but Indian markets do not have the depth to take the issue of a very size.
  • Fears of disclosure: The Company’s books and operations have been opaque for far too long but it is trusted by 250 million policyholders.
  • Investors trust at risk: Being one of the biggest financial institutions of the country, the move to privatize LIC will shake the confidence of the common man and will be an affront to our financial sovereignty.

Way Forward

  • Over the years, LIC has become the lender of last resort to the Government of India.
  • Confronted with an unprecedented fiscal deficit and worried by an economy in crisis, the government has to find resources.
  • This disinvestment is also a preferred option for ideological and practical reasons.
  • The government could utilize the money gained by selling off its stakes to improve services in public goods like infrastructure, health, and education.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments