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LIC divestment: Valuation method 'not revealed' to policyholders, Article 19 violated

Counterview Desk 

Peoples’ Commission on Public Sector and Public Services (PCPSPS) in a letter to the SEBI chairman Ajay Tyagi has said that SEBI should “exercise utmost care and consideration in the ongoing Initial Public Offer (IPO) of the Life Insurance Corporation of India (LIC) for safeguarding the interests of the policyholders and the society for whom the LIC carries on its activities.
Insisting that “acting in haste in pushing through the process of listing the LIC in the stock-markets would surely be against public interest”, commission lists what it calls “severe lapses in the government's approach to the disinvestment of the LIC”.
Consisting of former civil servants, academics, lawyers, business professionals, trade union leaders and activists, it, says the LIC’s disinvestment is sought to be undertaken by setting aside the unique role played by it “as the single largest social security provider in the country for the disadvantaged sections of society.”
Pointing out that disinvestment would especially hit the “those holding insurance policies of smaller ticket sizes”, who are spread across the country, both in urban and rural areas”, the commission insists, these policyholders have contributed immensely to the growth of the LIC over the last several decades; in fact, it is they who have funded the LIC”, with government have virtually made “no financial contribution” to it.

Commission’s observations:

1. Considering that it is the policyholders who have overwhelmingly contributed to the growth of the LIC since its inception, the commission feels that they have a legitimate claim on LIC’s equity base. The fact that LIC’s huge asset base has been built through policyholder participation justifies such a perspective. At best, the sovereign guarantee provided by the government to LIC's policyholders may be notionally valued and reckoned as a part of LIC’s equity capital.
The government provided the initial equity capital of Rs 5 crore in 1956 when the LIC was born. The equity base was expanded to Rs 100 crore in 2011; but the point to note is that even this expansion was made possible by funds provided by policyholders. Most recently, government’s equity in LIC has been expanded to Rs 6,600 crore, with the obvious intention of facilitating the proposed IPO.
The commission wishes to highlight the fact that the expansion of LIC into one of the world’s biggest life insurers has been based on contributions made by generations of policyholders, many of the ordinary people who have invested their life savings in this unique organisation.
2. If the above position is not reflected appropriately, it would result in private investors gaining undue control of the affairs of the LIC, to the detriment of the interests of the genuine stakeholders, namely, the policyholders, the majority of whom have invested their hard-earned household savings in the LIC.
The proposal of the government to allow both domestic and foreign investors to buy LIC's equity, though limited in the first stage, will set in motion an unfair process that deprives policyholders of their legitimate share in LIC's equity base.
3. In view of the widespread public criticism of the proposal to disinvest LIC's equity, the government has opened a severely restricted window of 10 per cent for the policyholders to mislead them into silence. The share being offered to policyholders bears no relationship whatsoever to their legitimate status as the prime promoters of LIC's growth since its inception. 
A proposal such as this one, which places policyholders who are the largest stakeholders in the LIC in an unfair position vis-a-vis the small segment of elite investors, is prima facie violative of the principles of natural justice and as such, is patently illegal.
4. Media reports indicate that the Department of Investment and Public Asset Management (DIPAM), which is processing LIC's disinvestment proposals, has entrusted the task of valuing the institution’s “embedded value” to a private foreign actuarial consultancy.
The government has also engaged investment bankers to act as advisers as a prelude to submitting the IPO documents for listing. It appears that the Ministry of Finance and DIPAM are trying to rush through with the IPO process in order to hasten the disinvestment process at any cost. The commission is extremely perturbed by recent media reports that the government has asked SEBI, the market regulator, to hasten its vetting of the Draft Red Herring Prospectus.
This, the commission feels, is highly inappropriate. Moreover, to date, the methodology of valuation and the related details have not been made available to either the policyholders or the public at large, who are entitled to such transparency under Article 19 of the Constitution and under Section 4 of the Right to Information Act, 2005. In the absence of adequate public disclosure of the manner in which the LIC has been valued, the whole IPO process would appear vitiated.
5. There are a few other basic public concerns about the valuation process. For example, has the valuer considered the market value and replacement of LIC's vast range of investments and its real estate assets? How does one value the public trust reposed in the LIC and the public goodwill it enjoys? What is the social value of the LIC in its role as a social security provider?
Policyholders are entitled to 95% of the annual surplus generated by LIC because they are the dominant stakeholders
LIC being much more than a mere corporate entity, valuing it from society's point of view is far more important than how a handful of stock market investors evaluate its worth.
Apparently, the valuation advisers are trying to assess its “embedded value” i.e. as perceived by the investors at a given point in time but that concept, which is largely stochastic in nature, is in itself highly subjective, certainly having no relationship whatsoever with the way the policyholders perceive it and the way the public at large views it. The commission fears that there may be gross undervaluation, which would be to the detriment of the interests of millions of policyholders.
6. The LIC plays the role of the single largest social security provider in the country and is a dominant promoter of the idea of life insurance in India. The funds generated by it from the policyholders' contributions and its other income finance many social sector projects. It is in the nature of public trust, enjoying the goodwill of the people.
The unjust entry of the stock market elite investors as equity holders of the LIC will tend to alter the Corporation's role drastically, imposing huge social costs including indirect losses to the policyholders. At present, the policyholders are entitled to 95% of the annual surplus generated by LIC, rightly so because they are the dominant stakeholders.
However, this position will be altered to their disadvantage once LIC is listed and the elite investors step in as shareholders. In particular, it would run counter to the Corporation's role as a part of the welfare state as provided in the Directive Principles of the Constitution, since the LIC set up under Article 19(6)(ii) is to be deemed to be an arm of the government under Article 12.
7. LIC being a unique institution, one of its kind, the commission feels that SEBI should examine the government's proposal with utmost diligence, as otherwise, it will be failing in its obligation to safeguard the public interest, as the LIC's role is largely that of a social security provider, accountable to its largest body of stakeholders, namely, its vast number of its policyholders who constitute a significant proportion of the households in India.
Not taking the policyholders and the public at large into confidence, who cannot compete with the few elite stock-market investors, would be grossly unfair. SEBI has the statutory obligation to protect the interests of the public at large as well as LIC's policyholders, who are notionally the dominant shareholders of the Corporation.

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