LIC IPO: Gross Underestimated Valuation; Put it on Hold, says EAS Sarma

RAISING serious questions on the valuation of Life Insurance Corp of India (LIC) for its initial public offering (IPO), EAS Sarma, former secretary to the Indian government, has asked the ministry of finance (MoF) to put on hold the entire process of disinvestment of LIC and other central public sector enterprises (CPSEs).
Sarma, in a letter to finance minister Nirmala Sitharaman, says, "I do not think that your ministry can rush through with the LIC IPO based on a perfunctory valuation exercise, merely to derive limited, illusory fiscal resources. I refer to the disinvestment proceeds as 'illusory' because they come from the same pool of domestic savings from which the government also borrows.
"If you get one rupee of disinvestment proceeds, you will be losing that one rupee which you could readily borrow from the savings pool on much more cost-effective terms, as government borrowings are backed by an implicit sovereign guarantee. The only difference that arises when the LIC is handed over to a few investors is that the government would then have dismantled an excellent institution like the LIC in the name of getting such illusory proceeds! I request your ministry and all others in the government who are concerned about this to ponder over the questions I have raised," he says.
The former secretary to the Union government further says, as he understands the MoF has appointed a private consultant to undertake the valuation of the LIC and according to the latest reports, "the estimated value of the public issue is Rs 15 lakh crore, and the so-called 'embedded value' (the statistical measure of investors' interest in an insurance company) of the corporation is Rs 4 lakh crore."
Sarma adds, "The methodology of valuation, the assumptions that have gone into it and the factual information considered by the valuer have not been divulged in the public domain. It is unfortunate that the policyholders of the LIC and the public at large should get information on this, only through rumours and gossip. If your ministry proposes to keep the public in the dark about such information, I am afraid that the entire LIC disinvestment process will stand vitiated, as it violates the letter and the spirit of Article 19 of the Constitution, which provides for transparency in governance".
"Prima facie, it appears to me that the value of the corporation at Rs 15 lakh crore and its embedded value of Rs 4 lakh crore is a gross underestimate, considering the vast, highly valuable land assets that the LIC possesses today across the length and the breadth of the country, the enormous public trust and the goodwill it enjoys as a public sector institution that truly belongs to the millions of its policyholders and its preeminent role in funding infrastructure, housing and the other social sector projects of crucial importance for the society at large," the former bureaucrat says.
Sarma also feels that the divestment of Central Electronics Ltd. (CEL) was 'miserably mishandled' by the Ministry. In November last year, he sent a letter to the Ministry but said he has not received any reply so far.
In his latest letter, he says, "Please recall how your ministry had grossly undervalued such a highly competent, valuable CPSE as the CEL, at a rate several orders of magnitude less than its intrinsic value and how your ministry had almost sold the company away to a private company of questionable antecedents, till CEL's employees, eminent scientists, and a civil society group, the People's Commission, raised their voices against it.
"It is equally unfortunate that your ministry should nonchalantly handle such an important matter as the disinvestment of a strategic CPSE so casually and that it should get exposed only when the civil society had expressed its shock and dismay! I get the feeling even at this stage that, by ordering an internal, departmental enquiry into the CEL matter, the Union government is only trying to obfuscate the contentious issues that revolve around it and delude the public," he added.
Having burnt its hands thus in the case of the CEL, Sarma says the MoF should be far more cautious in embarking on yet another questionable adventure of selling a treasured institution, this time, an insurance behemoth such as the LIC, of critical socio-economic importance, in a casual and indiscreet manner.
The former bureaucrat and environmental activist also warns about serious public concerns of the LIC IPO. He says, "In case your ministry insists on rushing through with the sale of the LIC equity as a prelude to its further disinvestment, I am sure there will be serious public concerns about how your ministry has determined the embedded value of the LIC and why it is ignoring the policy holders' stake in it, with the narrow intention of handing it over to a few profit-driven investors."
Sarma says, in the erstwhile Planning Commission, in which he had the privilege of working at one time, there used to be a project appraisal division (PAD) that had built a professional capability to carry out a social-cost-social-benefit appraisal of public investments, an exercise that now assumes relevance to valuing the LIC.
Unfortunately, he says, the successor to the planning commission, the present-day Niti Aayog, has neither the time nor the inclination, nor the wherewithal, to consider the societal dimension of public investments and public institutions. "I wish that the erstwhile PAD's services are available today to examine the value of the LIC critically," he points out.
According to the former secretary, there is an important conceptual issue regarding the valuation of the LIC, and from whose perspective it should be valued.
He says, "Should it be from the point of view of the society at large ('social value' based on social cost or social benefit analysis and the income distribution implications)? Should it be from the point of view of a handful of domestic and foreign investors, who wish to maximise their short-term profits, without caring to value the enormous societal value of the corporation?
"Should it be from the point of view of the government (both the Union and the states) who have used the LIC as an instrumentality of the state to realise several social objectives, rightly so? Should it be from the narrow point of view of the finance ministry that often uses the LIC to leverage the capital market, to bail out other CPSEs in times of stock market volatility and even to discipline the markets at the cost of the policyholders?
"I am afraid that the LIC IPO will turn out to be as contentious as the sale of the CEL, the only difference being that the controversy that will arise in the case of the LIC would be far more serious and far more questionable, as the LIC's role is a multi-dimensional one and its resources enormous," he says.
Mr Sarma sent a copy of the letter to the comptroller & auditor general of India (CAG). He says CAG should look at the proposed LIC disinvestment and all other cases of CPSE disinvestment and report to the Parliament.
"The so-called 'equity' created by your ministry to hand over the public sector insurance giant to a few profit-seeking investors does not strictly stand to reason. In my view, it is nothing but a fictitious idea. It does not reflect the policy holders' contribution to the LIC. Request you to be highly circumspect in this matter and take a conscious decision to put the LIC IPO on hold," the former bureaucrat says.
First published by Moneylife.