‘Scandalous’ LIC IPO to Result in ‘Loss’ of Rs 54,000 Crore

The People’s Commission on Public Sector and Public Services (PCPSPS) has urged the Narendra Modi government to halt the “scandalous” Life Insurance of Corporation (LIC) initial public offering (IPO) on May 4, which will result in a “loss of more than Rs 50,000 crore”.

The Commission, which includes eminent academics, jurists, erstwhile administrators, trade unionists and social activists, aims to discuss these issues with all stakeholders and people concerned with the process of policy-making and those against the government’s decision to monetise, disinvest and privatise public assets/enterprises.

In a press statement released on Monday, the PCPSPS—which includes Kerela’s former finance minister Thomas Isaac, former secretary with the ministry of power and economic affairs EAS Sarma and former member of the erstwhile Planning Commission SP Shukla—alleged that Union finance ministry, “succumbed to the pressure of global investors” by offering the shares at a “deep discount”. “This is nothing short of a scandal. It is, perhaps, the biggest in the annals of privatisation in India.” 

In an earlier statement issued on January 21, the Commission had made a persuasive case against the privatisation of the LIC. The IPO will not only cause a loss of thousands of crores to the exchequer, the PCPSPS said on Monday, but is based on the “expropriation of millions of policyholders of the LIC, who have built this unique and peerless financial institution”. 

Explaining how the government will “lose Rs 26,189 crore” due to the “deep discount” it is offering to investors, the Commission said that the Draft Red Herring Prospectus (DRHP) filed with the Securities and Exchange Board of India (SEBI) in February mentioned the Embedded Value (EV) of the LIC was estimated at Rs 5.40 lakh crores. It implied that the “base value of each 632.50 crore shares was worth, at least, Rs 853”.

According to the PCPSPS, since the “EV is of limited value in estimating the true worth of a life insurance company, and in keeping with the practice of the LIC’s much smaller private peers in the industry”, it was expected that a “multiplication factor of, at least, those used by these peers would be adopted in the pricing of the LIC issue”.

About two months ago, a multiplication factor of between 2.5 and 4 was expected to be used in pricing the shares, the Commission added. However, the DRHP filed by the LIC on April 26 mentioned that the “issue is now priced at Rs 904-Rs 949 per share. “This implies that at the upper bound of the price range offered to prospective buyers, the multiplication factor works out to just 1.11, much lower than what is justifiable.”

Given that “retail investors, employees and policyholders are being offered shares at a discount”, retail investors and employees get to pay R 904 per share and policyholders Rs 889 per share, which “implies a huge loss to the public exchequer”, the PCPSPS further explained. Therefore, at Rs 949 per share, the “total earnings from the offer of 22.1375 crore shares for the absolute maximum earning for the government from the IPO would be Rs 21,008 crore”.

The Commission contended that if a multiplication factor of 2.5 was used, the issue price would have been Rs 2,132 per share, “implying a total earning of Rs 47,197 crores”. As a result of the deep discount, the government is “losing Rs 26,189 crore” as a result of the 3.5% stake sale.

However, since the LIC is far bigger than any of its private peers, “a multiplication factor of higher than 2.5 is justified”, which implies a whopping “loss” of Rs 53,795 crore, the PCPSPS contended. According to the Commission, the April 26 DRHP reveals that the ratio of market capitalisation to EV of the LIC’s three main private peers—ICICI Prudential, SBI Life and HDFC Life—ranges from 2.49 to 3.96.

If a multiplication factor of even 3.96 (HDFC Life) to the LIC is applied, it shows that the “base price of each LIC share in the IPO ought to be, at least, Rs 3,379”. Therefore, at this price, the total earnings from the sale of 22.1375 crore shares would have been Rs 74,803 crores, which shows a staggering “loss” of Rs 53,795 crore. 

Alleging that the government has succumbed to “intense pressure exerted by global investors who have cited the war in Ukraine and the consequent turmoil in global markets”, the Commission asked why could not the government wait for a more opportune moment after markets had calmed. “How is it possible for the valuation of India’s biggest insurance company, sui generis in the world of finance, to vary so much within a matter of a couple of months?”

Pointing to the “expropriation of millions of policyholders who have been instrumental in making LIC what it is today”, the PCPSPS mentioned that the Centre’s investment in equity between 1956 and 2011 was a “paltry Rs 5 crore, “implying that it was the hard-earned savings of policyholders that was instrumental in the LIC blossoming into a mature insurance company and enabled the corporation to “provide a safe avenue for millions of Indians”.

The Commission requested all those who care for the country to challenge the Centre’s decision because it “marks the first step in the move to dismantle an institution that has been a household name for generations” and extended its support to the LIC employee unions.