The biggest bombshell in Finance Minister Nirmala Sitharaman’s Budget speech lay in something the Finance Minister does not even have the authority to do: the proposed sale of a portion of the government’s “stake” in Life Insurance Corporation of India (LIC). The announcement sent millions of anxious policy holders, who have invested their lifelong savings in insurance and pension products of LIC, scurrying for information about what lay in store for them. To even begin to understand why, one has to appreciate the simple fact that LIC is sui generis in the world of finance—nothing like it exists anywhere in the world, even in the era of globalised finance.
Innovation for common good
LIC is a classic example of how innovation for the greatest common good is possible even in the game of finance.
No government can sell off LIC right away simply because it is not structured as a company. Instead, it is uniquely structured as a corporation in which all profits, barring the 5 per cent dividend paid to the government for its equity, are distributed to policy holders.
Indeed, its structure as a trust, a giant mutual benefit fund if you will, has given it a popular respect that is unrivalled since its inception in 1956.
If private financial sector behemoths that have acted recklessly are deemed “Too big to fail”, LIC can be said to have been the exact opposite: it is “Too good to fail”.
Nirmala Sitharaman’s perfunctory statement, “The government now proposes to sell a part of its holding in LIC by way of an initial public offer (IPO),” is vacuous for the simple reason that the government, apart from the initial equity of Rs.5 crore in 1956, has never ever made any investment in LIC to now stake a claim to ownership of the corporation, its assets or its reputation.
Even when the Insurance Regulatory Authority of India mandated an increase in equity to Rs.100 crore for insurance companies, the funds were raised internally by LIC.
The only support provided by the government has been intangible, in terms of the government’s sovereign guarantee that backs policies LIC has issued in the last 64 years. A claim on that guarantee has never ever had to be made simply because LIC has been by far the biggest investor in the Indian market. Instead, on umpteen occasions it has been commanded by the government of the day to either rescue the stock market from collapse, rescue a public issue by a government company, or make investments in government undertakings, such as the Indian Railways.
LIC has held its own despite the entry of private insurance operators. More than 70 per cent of all life insurance premiums paid in India go towards policies issued by LIC. More than three-quarters of all life insurance policies issued in India are by this single entity. It commands assets worth over Rs.31 lakh crore and churns out an investible surplus to the tune of at least Rs.3-4 lakh crore every year.
In short, there is nothing like it in India. It is virtually impossible to imagine any entity that makes no profit for itself, yet has the scale of operations that LIC has in the finance industry anywhere in the world. Also, it is difficult to even value such an enterprise.
The Securities and Exchange Board of India guidelines governing the extent of listing of public limited companies stipulate that 35 per cent of the shares be offloaded in the market. Given the extreme reluctance of Indian private industry to invest—which is a significant cause of the ongoing economic slowdown—it is extremely unlikely that any of them, or even a consortium, would have the stomach to buy LIC if or when it goes on sale. The only solution is offer it at a bargain basement price. Surely that would be a scandal by any standard.
The Finance Minister’s utter irresponsibility in making such a statement lies in the fact that she has announced a stake sale that threatens the status of millions of policy holders.
There are some 42 crore LIC policy holders, of whom 30 crore hold individual policies while the rest subscribe to group insurance policies. Soon after her announcement, social media was abuzz with anxious and irate policy holders and pension investors who had committed lifelong savings to LIC and wondered what lay in store for them. Among the questions raised by them were: What would happen to the sovereign guarantee that covered existing policies? How could the government change the terms of the contract midstream? What would happen to savings despoiled in LIC’s pension schemes?
Of course, these and several other such queries were met with bureaucratic waffling in the days after the Budget.
The only tangible response was in the vague statement by Finance Ministry bureaucrats that the “privatisation” would happen only towards the latter half of the next financial year—clearly indicating the government’s realisation that selling LIC was not immediately possible.
Amanulla Khan, who stepped down in January as president of the All India Insurance Employees Association (AIIEA), told Frontline that for the IPO to be even possible, LIC needs to be converted into a government-owned company. (AIIEA is the leading union in the industry.) How this would be done or what would happen to LIC’s assets, over which the government can legally stake a claim to the extent of 5 per cent only, remain vexatious issues about which no one in the Modi regime seems to have even thought about.
The first step in the rocky road to privatisation would be to amend the LIC Act, which governs the functioning of LIC. Indeed, the Act specifies that 95 per cent of the profits made every year must be distributed in the form of bonuses to policy holders.
Parliamentary sanction
The fact that the Modi regime would have to seek parliamentary sanction for an amendment to the Act provides the opportunity for a political articulation of the groundswell of opposition that is sure to emerge from millions of policy holders.
Meanwhile, opposition to the move has already emerged from the rank and file within LIC. On February 4, thousands of LIC employees across the country participated in a one hour “lunch hour demonstration” at LIC offices. Amanulla Khan said that employees from all ranks within the organisation participated in the protests. The AIIEA, which is known for innovative and novel methods of protests, ensured that policy holders and other customers were inconvenienced to the least extent possible.
It is also planning to harness support from LIC’s “extended family” of agents that has kept the organisation going for decades. Amanulla Khan said that LIC agents, numbering about 12 lakh, who are likely to be affected by the move to privatise the organisation, are the employees’ natural allies in the battle ahead.
The union also plans to use the LIC Policy Holders’ Councils within LIC’s existing structure, meant for redress of policy holders’ concerns, to mobilise opposition to escalate resistance to the proposal.
