Selling Family Silver: Will LIC’s Divestment Create Value?
The hype around the Life Insurance Corporation’s (LIC) initial public offering (IPO) that opens tomorrow, and the belief that it will change the trajectory of the markets with a new breed of investors lapping up a world class company, etc is unfounded to say the least. Selling family silver to manage household expenses is symptomatic of a distressed financial situation – almost akin to the descendents of the erstwhile landed gentry of pre independence zamindars in India.
What is perhaps worse is if such sales are at a massive discount to its intrinsic value which can only indicate the seller ‘s desperation index. For the record, LIC is reportedly being sold at 1.1-times its embedded value (EV). This even as much smaller private insurers in India are valued at 2.5-3 times. The notional loss to GoI on this itself would be of the order of Rs30,000 crore. The larger question, though, is regarding the rationale of this divestment.
Post -Air India, there was optimism that India had finally bitten the bullet and would now progress on genuine privatisation of its public sector utilities (PSUs), and not merely sell bit pieces of its Navaratnas to raise funds through backdoor divestments seen post the Vajpayee period.
Was Air India a one-offprivatization, or an enduring policy statement on public sector accountability and India’s turn to redefine the boundaries of state intervention in the economy ? I had warned, in a Businessworld oped in Oct 2021, that the ultimate success of any major policy rests primarily on gauging its policy intent. In my view, the government’s decision seems neither ideologically driven by its right-wing ideology, nor conducted by classical economic theories of principal-agency costs, but by the hard reality of fiscal imbalances and theinnately uncompetitive business model of Air India in the highly competitive global airline industry.
The LIC IPO proves this point. The Air India privatization was just a convenient transaction without any change in the fundamental approach adopted by India. This remains radically different in, say, Europe where there were significant value-accretive sales for the likes of Lufthansa, British Telecom, Air France, British Gas, Rolls Royce, etc and the governments’ residual holdings post-divestment. These took many years because, like us, Europe too had a fiercely nationalistic sense of public-sector asset ownership. But once it was clear tothe leadership of these countries that the need fortight state control - being strategically crucial for considerations of security and industrial policy – are outdated concepts the world recognized in the early 80s with the advent of Thatcher, most governments took a definitive path, and stayed the course, to reduce the role of the state in the economy while sticking to the objective of creating significant value addition through the process. In other words, not sell off public assets for a song.
Post-2004, India has consistently wavered from this path and compromised public interests at the altar of political and fiscal expediency. From backdoor divestments with one PSU buying stake from another to offloading an insignificant number of shares without change in management control has been our mantra. The Hindustan Zinc (HZL) privatization in 2002 at a valuation of INR 1700 cr is now worth INR 1. 36 L cr with the Government’s residual 30% stake valued at INR 40 K cr. Contrast this with Coal India – similarly touted as a game changing moment for India and its capital markets during its divestment in 2010 – which has actually lost 25% of its value from the IPO valuation of INR 151k cr and 36% post listing. Similar is the case with GIC, New India Assurance and many other PSUs which followed a similar path of stealth divestment and not strategic divestment or privatization.
The intent of the LIC IPO is further clouded by its steep discount. Real estate assets valued at several lakh crores are not even being computed in its EV, which itself is an inherently debatable methodology. By amending the LIC Act in 2021, LIC changed its fundamental and unique capital structure of participatory policyholders bearing both risk and rewards of non-participatory policies.
As V Sridhar recently points out (bit.ly/3vxVkay), after the changes in the LIC Act, the EV of LIC zoomed to Rs 5.4 lakh crore by September 2021 from a mere Rs0.96 lakh crore in March 2021, clearly indicating the impact of expropriating the rights of such policyholders. Such transfer of immensely valuable, covenanted financial rights over surpluses built over decades from policyholders to new shareholders is unprecedented.
The Supreme Court is presently seized of, inter alia, the matter of ignoring real estate assets of roughly Rs20,000 crore as part of the valuation for HZL in 2002. The same incongruence seems to be repeated 20 years later.
From a broader perspective, GoI’s divestment program, and especially privatisation, will remain the most perceptible, enduring statement of its intent to redraw the boundaries between the state and the economy, and commence on a sustainable process to fundamentally change the methodology for efficient allocation of public capital and driving accountability to its ultimate owners -- the Indian citizen.
The Modi government’s deft handling of untangling some historical Gordian knots in the economy -- telecom, coal and power – had provided hope that it can redefine the role of the public sector through a well-crafted strategic divestment strategy. Regrettably, such hopes have been belied in the LIC IPO.
The author is a Sloan Fellow of the London Business School, non executive director, and an advisor to chairmen, of corporate boards.
