The idea of listing LIC of India was never a government priority. When nominal economic growth exceeded double digits and market friendly reforms were improving India’s World of Bank’s Ease of Doing Business Ranking, there was little incentive for the government to share LIC’s stable dividend income, which paid over Rs 26 billion ($360 million) last year.
Times are tougher now and priorities change. In order to bridge the country’s widening fiscal deficit and allay broader economic concerns, Nirmala Sitharaman, India’s finance minister, identified $29 billion of state assets for sale in her budget on February 1. LIC accounted for a third of the potential capital raised. Air India and Bharat Petroleum Corporation are also on the block.
Amid weak credit demand and sluggish investment cycle, India’s economy is indeed tapering. For the three-month period ended September 2019, the economy expanded just 4.5%, a six-year low and well below 7% from the corresponding period in 2018.
THE ARAMCO OF INDIA
Given its potential equity valuation and balance sheet with more than $430 billion in total assets, LIC going public would be “akin to the Saudi Aramco listing for our capital markets” according to Vijay Bhushan, president of the Association of National Exchanges Members of India.
The comparison is an interesting one - the Saudi Aramco deal raised a healthy $26 billion in 2019, but many foreign investors eventually steered clear, put off by the risks around governance, the environment and regional geopolitics.
From the Indian government’s perspective, the benefits to monetise its holding are both quantitative and qualitative. In addition to raising between $10 billion to $12 billion, selling LIC would signal the administration’s intention to actually promote corporate governance and transparency.
With over 70% market share in the insurance market and stable dividend income, LIC becomes an attractive asset for foreign institutions, particularly considering $17 trillion in global bonds sell at negative yields. Given its size and probable inclusion into the MSCI Emerging Market, LIC would also attract in passive fund flows.
A BLACK BOX
LIC’s Aramco comparison stems from opening the company’s closed book and allowing analysts to assess what is inside. LIC has never publicly disclosed its embedded value, with the equity valuations based on estimates from its assets under management.
Most professional investors that have spoken to FinanceAsia are generally split on what analysts will find inside LIC, where 60% of revenues comes from individual insurance and group insurance schemes. They worry that since LIC had been used as a vehicle to bailout other public sector companies, investors would indirectly buy something that they had initially avoided.
LIC’s attractive assets, including a double-digit percent of ITC and Larsen & Toubro, as well as a position in HDFC Bank, would be offset by its 51% ownership of IDBI Bank, state-owned lender with the most toxic balance sheet.
Cleaning up LIC will prove challenging but necessary to attract foreign capital, and hopefully to avoid Aramco’s fate which ultimately decided to slimdown its float and focus on domestic investors.
DOMESTIC CHALLENGES
Other hurdles are challenging. LIC may prove too large for the Indian market, testing the available liquidity for a multi-billion-dollar listing. The government would also need to amend the current insurance law, changing the dividend payment structure to the state and public holders, aligning them closer to the practice of private insurers. LIC did not respond for comment.
When all is completed, the government will likely retain its majority stake, gradually selling more over time but keep majority ownership. “Then what?” asks Neil Mascarenhas, a portfolio manager at Hamon Investment Group who spoke to FinanceAsia. “This is not a permanent solution.”
“LIC’s valuation is also based on a robust economy, which the country is not experiencing. But India’ needs these divestments to boost the economy. This creates a chicken and egg scenario,” continued Mascarenhas. “Getting LIC to list this year with the valuation they want will be challenging,” mirroring the challenge Aramco faced.
LIC is one of the government’s last remaining large assets, where there is a general agreement that divesting the large insurance company would bring immediate remedy for the economy. Other divestment plans, including Air India and Bharat Petroleum Corporation, each have a unique set of challenges and would unlikely close the fiscal gap like LIC could.
Given what is at stake and the recently re-elected administration to a second five-year term, the impetus from the government to go slow supersedes the will to move quickly, suggesting that an LIC is more likely to come not before the start of the country’s 2022 financial year.
To list LIC is to not only list India’s golden goose but remove the insurance’s company role as the country’s buyer of last resort. Added compliance and administration costs affiliated with being a public company weigh on the earnings stream that government relies, but the government needs to debate the role of LIC going forward.
At this junction, it appears the government’s focus is the economy, so they should get to work.
