A group of economists, bureaucrats, advocates and senior journalists has warned the government that it “runs the risk of significantly undervaluing” the assets of Life Insurance Corporation (LIC), which is expected to list on the stock market by the end of March.
The government has asked regulators for a swift review of LIC’s draft prospectus as it pulls out all the stops to have the country’s biggest IPO completed in the next two months.
The Securities and Exchange Board of India has been urged to complete its vetting process in less than three weeks instead of the 75 days it usually requires, according to reports.
The government’s divestment department is solely focused on the IPO for the giant state-backed insurer, from which it hopes to gain as much as $12 billion, the reports said.
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However, the Peoples’ Commission on Public Sector and Public Services has raised doubts over the disinvestment process itself, noting that “the government, by allowing the valuation exercise to be conducted by an actuarial consultancy that has little experience in understanding the working of a unique insurance service provider like the LIC, runs the risk of significantly undervaluing its assets”.
“The only beneficiaries from such an egregious course would be private and foreign investors participating in the proposed IPO,” said the commission, comprising, among other, ex-IAS officer EAS Sarma, former Kerala finance minister Thomas Isaac, economists CP Chandrashekhar, Prabhat Patnaik and Aditi Mehta and lawyer Indira Jaising.
“Imagine a Boeing 747. You take it to a street vendor and say, Can you value this? How will you value it? We are asking stock market investors to value the worth of LIC. They have appointed a stock market consultant advisor group. LIC has got properties all over the country. Now you have to see the market value of each land holding. How do you value these policyholders’ goodwill? LIC survives on goodwill and public trust. How do you value that? There is no other social security cover other than LIC. How do you value that?”
The commission said the IPO is “prima facie not legal and unconstitutional” and that it “sends a negative message on the government’s intention and resolve to fulfil its constitutional mandate under the Directive Principles to promote the welfare of the people”.
“The commission fears that the dilution of government stake would dramatically reorient the LIC from what it has meant to the people over the decades,” it said. “Most importantly, the change in the character of LIC is likely to significantly limit the reach of life insurance in India, a task that has been accomplished singlehandedly by this institution, which has been India’s pride. Indeed, the LIC is sui generis in the world of finance; nothing like it exists anywhere in the world.”
The commission said there is an “inherent weaknesses” in the government justifying disinvestment of LIC and the other central public sector enterprises on the ground that it requires additional fiscal resources to fund its social sector schemes.
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There is ample opportunity for the government to prune many items of non-essential and unproductive public expenditure, thereby reducing the fiscal gap, it said. “Moreover, the government, in our view, should levy redistributive taxes on the more affluent sections of the society to finance social security schemes for low-income groups, especially considering that the existing paradigm of development has widened the income inequalities among the people,” the commission said
Advising the government to drop the disinvestment of LIC altogether, the commission said: “Considering that it is millions of small policy holders who have almost exclusively funded LIC’s phenomenal growth over the last six decades, without any significant support from the public exchequer, the way the government has relegated the policy holders to the background, merely to benefit a few affluent investors, is patently reprehensible.”