MUMBAI: Ahead of its proposed mega initial public offer (IPO), the government is looking at ways to align Life Insurance Corporation of India’s (LIC’s) rules for surplus distribution to shareholders with what is applicable for private companies.
Currently LIC, which is governed by a special law, is allowed to transfer 5% of its surplus to the shareholders’ fund. The remaining 95% goes to the policyholders’ fund for paying bonus on eligible life insurance policies. In case of other life insurance companies, which are regulated through the Insurance Act, the permissible allocation is in the ratio of 90:10.
With the IPO planned in the fourth quarter of the current fiscal, the government intends to bring parity to make investment into LIC an equally attractive proposition, sources familiar with the deliberations told TOI. “It’s only natural that investors will expect a similar structure. We are working out the details, along with a few other changes,” a government source said.
The Centre hopes that this will help balance the interests of shareholders and policyholders and still make the IPO attractive for investors.
The government is also expected to clarify the level of foreign investment that will be permitted in the company after its listing. Currently, up to 74% foreign direct investment (FDI) is allowed in the insurance business, but LIC is expected to be governed by a special dispensation.
LIC’s valuation surplus is arrived at after calculating its entire liabilities in respect of the business that it has already underwritten. This means that policyholders with term insurance, guaranteed return policies and unit-linked plans will not be impacted by dividend distribution policies. It is only the participating policies where the benefits are determined by the level of bonus that will be affected.
According to industry sources, a change in the payout ratio will not make as significant a difference to policyholders as, say, a reduction in RBI’s policy rate. For private companies, the profits from selling protection also account for a significant portion of their profits.
Any surplus that a private insurer makes from selling protection goes entirely to the policyholders. In the case of LIC, the profits are shared between the government and other policyholders. Changing the dividend distribution policy will benefit shareholders but can, again, impact existing participating policyholders.
The government believes that several individuals who have purchased life covers from the insurance behemoth will also buy LIC shares during the IPO as a certain percentage of the issue will be reserved for them. This will entitle them to dividends in the coming years.
For LIC’s policyholders, the greatest attraction is that whatever has been promised in the policy will continue to be guaranteed by the government. The government, while amending the LIC Act, has retained section 27, which states that the sums assured by all policies issued by the corporation — including any bonuses declared in respect thereof and all bonuses — shall be guaranteed as payment in cash by the central government.
A senior government official said that the department of investment and public asset management will work out the details of the proposed issue based on the embedded value that is currently being worked out.