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A golden goose, GoI bent on selling LIC 'for pittance' without consulting stakeholders

By Thomas Franco* 

In spite of strong opposition from all sections of the society, the Finance Minister (FM) recently asked her Ministries to speed up Life Insurance Corporation (LIC) Initial Public Offer (IPO). Does she realise that this can lead to collapse of the economy over a period of time because LIC is a golden goose which is giving golden eggs regularly to the economy, development projects and providing social security to the majority of the marginalised people of this country.
Almost one third of the GDP is connected to LIC and almost one third of the budget of the Government of India (GoI) is financed by LIC. The FM has stated that the listing would bring discipline while giving retail investors an opportunity in wealth creation. She doesn’t say where the indiscipline is. It is her Ministry which is overseeing LIC and her Secretary is on the board of LIC. The so-called retail investors in India are not even 3% to whom she wants to give wealth.
From a simple investment of Rs 5 crore, today LIC has assets worth Rs 36 lakh crore as per the estimates. In 64 years it has paid a dividend of Rs 28,695 crore to the GoI. It has invested Rs 38 lakh crore in securities, shares and infrastructure projects. It holds 9.25% shares in State Bank of India (SBI), the largest bank, 51% in IDBI Bank, 10.37% in ICICI bank, shares in many public sector as well as private banks, considerable shares in public sector enterprises, considerable shares in private corporates like Infosys, TCS, Wipro, Piramal etc.
And its income from investments last year was Rs 2,14,833.95 crore. It is the largest owner of land, after the Indian Railways. It is LIC which intervenes in the stock market along with the public banks when there is a crisis in the stock market.
So where is the indiscipline or inefficiency?
The listing, disinvestment of 5-10% shareholding initially will ultimately lead to privatisation of this unique company which is functioning as a trust or mutual benefit society for almost every household in the country, especially the rural, marginalised and weaker sections of the society. India has 24.8 crore households and LIC has 40 crore policies.

Likely impact

With over 25 crore people below the poverty line, India today is in the category of “countries of mass poverty.” With waves of corona virus more and more people are coming under severe economic and financial distress. At the same time, unlike many other countries, over 90 percent of Indians do not have social security to take care of the distresses and tragedies of life.
LIC is the only means left to them to provide for these distresses and tragedies. Depriving them of these would be an assault on the life and livelihood of the common people which is bound to be unconstitutional.
This deprivation would be violation of Part IV of the Constitution.
Senior citizens deposit money in LIC to get assured return with safety and security. LIC handles social security schemes of GoI through cross subsidisation. A glance of few schemes shows the massive contribution of LIC in providing social security.
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) is a government subsidized one year cover Term Life Insurance Scheme. The PMJJBY is available to people in the age group of 18 to 50 years having a bank account who give their consent to join / enable auto-debit. The life cover of two lakh rupees shall be for the one year period stretching from June 01 to May 31 and will be renewable. The premium is just Rs330 per annum. The scheme is being offered by Life Insurance Corporation and few others. Since the launch of scheme LIC has enrolled 1,42,29,371 members and paid claims under 1,17,851 cases amounting to Rs.2,357.02 crore as on March 31, 2021.
To protect elderly people aged 60 years and above against a future fall in their interest income due to the uncertain market conditions, as also to provide social security during old age, Government of India launched a simplified scheme of assured pension of 8 per cent called the Pradhan Mantri Vaya Vandana Yojana (PMVVY).
The scheme is being implemented through Life Insurance Corporation (LIC) of India. As per the scheme, on payment of an initial lump sum amount ranging from a minimum purchase price of Rs 1.50 lakh for a minimum pension of Rs 1000 per month to a maximum purchase price of Rs 7.50 lakh for maximum pension of Rs 5,000 per month, subscribers will get an assured pension based on a guaranteed rate of return of 8 per cent per annum, payable monthly.
The Atal Pension Yojana (APY) was launched on May 9, 2015 to create a universal social security system for all Indians, especially the poor, the under-privileged and the workers in the unorganised sector. APY is administered by Pension Fund Regulatory and Development Authority (PFRDA). APY is open to all bank account holders in the age group of 18 to 40 years and the contributions differ, based on pension amount chosen.
Subscribers would receive the guaranteed minimum monthly pension of Rs 1,000 or Rs 2,000 or Rs 3,000 or Rs 4,000 or Rs 5,000 at the age of 60 years. The monthly pension would be available to the subscriber, and after him to his spouse and after their death, the pension corpus, as accumulated at age 60 of the subscriber, would be returned to the nominee of the subscriber.
In case of premature death of subscriber (death before 60 years of age), spouse of the subscriber can continue contribution to APY account of the subscriber, for the remaining vesting period, till the original subscriber would have attained the age of 60 years. Subscribers can make contributions to APY on monthly/ quarterly/ half-yearly basis. Subscribers can voluntarily exit from APY subject to certain conditions, on deduction of Government co-contribution and return/interest thereon.
LIC is the fund’s manager for this scheme. As the pension paid under the employees provident fund scheme is meagre many workers join this scheme.
During the year 2020-21, LIC Pension Fund Ltd received an amount of Rs 22,333.29 crore under 13 schemes. The total Assets under Management (AUM) was R. 1,21,027.69 crore as on March 31, 2020 which rose to Rs 1,63,389.50 crore as on March 31, 2021. Of the above Rs 1,59,358.34 crore is managed under five Government Pattern Schemes and Rs 4,031.16 crore is managed under eight Private Sector Schemes.
In pursuance of the corporate objectives of providing insurance cover to more and more people, greater emphasis is laid on covering individuals who have no previous insurance on their lives. During the financial year 2020-21, 186.44 lakh individuals were insured for the first time for the total sum assured of Rs 4,90,404.08 crore as against the previous year’s figures of 185.53 lakh policies for sum assured of Rs 5,15,975.10 crore.
Life insurance in India is not a purely business activity but an important and non-delegatable activity of a welfare state
The ratio of first insurance to total business completed for the year comes to 88.89% and 83.67% in respect of number of policies and sum assured respectively. Is it not remarkable to bring in almost two crore people every year into this social security? Does the FM know of this?

Rural thrust

Sustained and conscious efforts are made to carry the message of life insurance to the rural areas, especially the backward and remote areas. As a result, there has been steady growth of new business from these areas. The new business from rural areas amounts to Sum Assured of Rs 91,961.61 crore under 45,00,369 policies representing 21.45% and 15.69% share of policies and sum assured respectively completed during the Financial Year 2020-21.
The private sector is heavily concentrated in the bigger cities. According to Insurance Regulatory and Development Authority of India (IRDAI) Report 2019- 20, in Tier I cities (with population of more than one lakh), LIC has 1,844 branch offices while the private sector has 4,717 branch offices. In Tier IV cities/towns (population between 10000-19999) LIC has 1,037 branch offices, whereas the private sector has only 107 branch offices.
This clearly shows the urban bias and neglect of rural areas.

Micro insurance

Micro Insurance (MI) Business vertical of LIC completed 9,92,200 policies with Rs 341.52 crore First Premium Income in FY 2020-21. Total number of policies sold by the vertical since inception is 2.22 crore, thus providing valuable insurance cover to the underprivileged and low income segments of the society. The contribution of this vertical to LIC’s new business in terms of number of policies for FY 2020-21 was 4.73%.
Micro Insurance policies are sold through specialized distribution channels comprising of Non-Government Organizations (NGO), Self Help Groups (SHG), Micro Finance Institutions (MFI), Corporate Agents, select Conventional Agents, Brokers, District Cooperative Banks (DCB), Regional Rural Banks (RRB), Urban Cooperative Banks (UCB), Primary Agricultural Cooperative Societies (PACS), Other Cooperative Societies (CS), Banking Correspondents (BC) and Farmer Producer Companies (FPCs). There are 21,547 MI Agents on roll as on 31.03.2021.
MI policies are also sold through the Point of Sales Persons – Life Insurance (POSPs-LI) engaged by Insurance Intermediaries like Brokers, Corporate Agents, etc., and Rural Authorised Persons (RAP) and Village Level Entrepreneurs-Insurance (VLE-Ins) engaged by CSC e-Governance Services India Limited.
The products which were available for sale through this vertical during the Financial Year include the Term Assurance Plans, LIC’s Bhagya Lakshmi and LIC’s New Jeevan Mangal and the Endowment Plan, LIC’s Micro Bachat. This is another golden egg of LIC.
This indicates the segments of population on which the life insurance company concentrates. The lower the premium per policy which is called ticket size is the indication that greater numbers of policies are procured from the weaker sections and lower middle class. Higher the size of premium is indicative of concentration on upper middle class and richer sections of the population.
For the year 2020-21, the average premium of a policy sold by LIC is Rs 16,156 while for the private sector it is Rs 89,004. It is interesting to note that for the year 2019-20, the ticket size for LIC was Rs 23,871 while for the private sector , it was Rs 76,804.
As can be seen, there is a decline in case of LIC while for the private sector there is an increase.
This is also indicative of the fact that the impact of economic crisis has been felt more by the segment LIC caters to compared to the segment which patronizes the private sector.

Investment in development schemes

LIC is the biggest investor in various public sector banks, public sector enterprises and also private banks and private companies. 82% of its investments are in government securities which enables the GoI to spend money in the economic development.
The total investments of LIC amounted to Rs 36,76,170.31 crore as of March 31, 2021. It subscribed an amount of Rs 2,66,664.81 crore (book value) and Rs 1,17,621.00 crore (book value) to the securities of the GoI and the new loan issues of the various State governments (including other approved securities) respectively during 2020-21.
It has been the constant endeavour of LIC to provide security to as many people as possible and to channelize the savings mobilized for the welfare of the people at large. To meet this end, LIC has been promoting social welfare through investments in infrastructure and social sector such as generation and transmission of power, housing, water supply and sewerage, roads, bridges, road transport and railways. The total investment in these sectors during 2020-21 was Rs 26,322.90 crore.
The investments as of March 31, 2021 by way of Central, State and other government guaranteed marketable securities, loans, debentures and equity investments in infrastructure and social sector amounts to Rs 26,86,527 crore. These are long term investments and rate of return will be less. The shareholders will insist on reorienting the investments to get higher return even if the risk is higher.

Level of efficiency

There is so much talk of efficiency of the private sector. The IRDAI Annual Report for 2020-21 has shown that the operating expense of LIC is 8.68% of the total premium income. The same for private sector is 11.72%. LIC has been serving larger number of policies at an economical cost.
All this will go away with privatisation. Shareholders will only insist on more profit ignoring the social security needed for the larger majority.
Policy holder’s right to property guaranteed under Article 300A is violated by the threat to their policy which will no longer be payable by a state but a private party. LIC Act provides a sovereign guarantee for all the Insurance Policies of LIC. Once privatised this guarantee cannot continue.
Life insurance in India is not a purely business activity but an important and non-delegatable activity of a welfare state which cannot be outsourced to the private sector.
Our country already has 23 private insurance companies including SBI Life managed by SBI- the largest bank in the country. As per the IRDA report the complaints of unfair practices in private insurance companies are very high though they share only 33% of the premium.
Similarly mis-selling is the highest in banks running insurance companies.
Hence the efforts to privatise LIC step by step are going to be dangerous for the country and the majority of people. LIC is accountable to parliament today. There have been many parliament reports which have given suggestions to LIC which were implemented. LIC strictly follows RTI Act and has never been fined for violation of the Act.
All this will vanish with privatisation.

Fair valuation?

The valuation of LIC is a tricky business. The government has appointed the actuarial firm Milliman to value LIC. It is reported that they have estimated the embedded value of LIC as Rs 4 lakh crore which is questionable.
LIC sells more than 50 products and the present value of the future profits of these products have to be assessed. It is the biggest real estate owner in the country after Railways and these assets are located in every part of the country. The value of the real estate has to be arrived at.
LIC has many subsidiaries, both in India and abroad, and they also have to be valued. Moreover, it has a brand value which is difficult to estimate. There are expectations that in the next few weeks, the final valuation will be arrived at. This, by rough estimates, cannot be less than Rs 10-15 lakh crore.
This sounds astounding as this value has been created on a capital of Rs 5 crore. It is very difficult to say whether this could be a fair value. We have experienced that public sector units that are sold by the government have always been undervalued.
There has been absolutely no consultation with the stake holders- the 40 crore policy holders. There has been no discussion in the Parliament too. The Finance Minister should understand the reality and stop the sale of this Golden Goose.
---
*Former General Secretary of All India Bank Officers’ Confederation. Source: Centre for Financial Accountability

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