IPO of the LIC must be halted, Commission on Public Sector and Public Services tells union government

THE Commission on Public Sector and Public Services earlier today released a statement titled 'Stop the Scandalous IPO: LIC IPO will result in loss of more than Rs. 50, 000 crores'. The statement addresses the Union Government to take urgent steps to halt the Initial Public Offer [IPO] of the Life Insurance Corporation of India [LIC], one of the biggest life insurance companies in the world, amounting to the biggest IPO in the history of capital markets.

The Commission is a group of eminent academics, jurists, erstwhile administrators, trade unionists and social activists concerned with the process of policy making, especially relating to the government's decision to monetise, disinvest and privatise public assets/enterprises. It had come out with an interim report late last year titled Privatisation: An Affront to the Indian Constitution.

The statement explains that the IPO, which is to be launched on May 4, points towards the Union Finance Ministry succumbing to pressure by global investors, and offering the shares at a deep discount, thus representing "the biggest [scandal] in the annals of privatisation in India".

On January 21, the Commission released a statement explaining its case against the privatisation of LIC. It expressed its concern not only towards the loss of thousands of crores of rupees to the public exchequer, but also the expropriation of millions of policyholders of the LIC.

The present statement delves into details of the Draft Red Herring Prospectus [RHP] filed with the Securities and Exchange Board of India in February. It highlights that the Embedded Value [EV] of LIC was expected at Rs. 5.40 lakh crores, which indicated the base value of its 632.50 crore shares to be worth Rs. 853. It states its expectation of a multiplication factor of between 2.5 and 4, as used by LIC's private peers, to be used in pricing the LIC shares on account of the limited value of EV in estimating the true worth and in keeping with the practice of LIC's smaller private peers.

To the shock of the Commission, the RHP filed on April 26, suggested the price of the issue at Rs. 904-949 per share, which implies a much lower multiplication factor of only 1.11. Highlighting the huge loss to the public exchequer, the statement points out retail investors and employees get to pay Rs. 904 per share, and a policyholder pays Rs. 889 per share.

On account of the deep discount with the low multiplication factor, the statement claims that the government is in a loss of Rs. 26, 189 crore due to the 3.5 per cent stake offered in the IPO. It reiterated that since LIC is bigger than any of its private peers, a multiplication factor of higher than 2.5 is expected.

On analysing the RHP issued on April 26, and evaluating the ratio of market capitalisation EV of LIC's main private peers, the statement claims that the multiplication of 3.96 reveals a loss of Rs. 53, 795 to the public exchequer.

Indicating that the pressure from investors was due to the war in Ukraine and the resulting "turmoil in global markets", the Commission raises the following questions: "Why could the Government not have waited for a more opportune moment, after markets had calmed? Why could it not have rebuffed the pressure from capricious investors whose interests are contrary to those of millions of policy holders who will be the ultimate losers? How is it possible for the valuation of India's biggest insurance company, sui generis in the world of finance, to vary so much in the matter of a couple of months?".

It reiterates its previous statements on the contribution of the policy holders in allowing LIC to grow into a mature insurance company, where between 1956 and 2011, the government's investment in equity was a mere five crore rupees.

The Commission concludes the letter by urging the Union Government to consider the merciless expropriation of policyholders of LIC and to thereby halt its IPO. It also urges people to challenge the government's decision in order to stop the dismantling of LIC. Further, to the employees' unions in the LIC that have resisted this move of the government, the Commission expresses its support and solidarity.