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A version of this article first appeared in The India Cable – a subscribers-only newsletter published by The Wire and Galileo Ideas. You can subscribe to The India Cable by clicking here.
Recently, the Life Insurance Corporation (LIC) was declared the world’s 10th largest insurance brand. In Asia, it would easily be among the top 2-3 valued insurance companies. However, this is not reflected in the arbitrary manner in which the government is trying to sell its stake in LIC, when global financial markets are in turmoil due to the Ukraine war and the US Federal Reserve is fast-tracking interest rate hikes to withdraw excess liquidity and cool global inflation. The government has announced a much-truncated sale next week of 3.5% stake in LIC at a valuation less than half of the February estimate. It will fetch only Rs 21,000 crore. The sharp reduction in the estimated value of the company is a direct result of changed global market conditions in just over two months.
There can’t be a more inopportune time for the government to sell shares of its most valued company. The LIC offer has received a very lukewarm response because of current global market conditions. The government had initially committed to sell 10% stake via an initial public offering. The market value of the company was then estimated to be Rs 12-14 lakh crore. Seeing that global conditions were worsening, the government halved the size of the stake sale from 10% to 5%, which would be easily absorbed by global markets and fetch about Rs 65,000 crore if the company was valued at Rs 13 lakh crore, as estimated initially.
However, after doing extensive roadshows abroad to market LIC to big pension funds and sovereign wealth funds, the government realised there wasn’t enough appetite for even a reduced 5% stake sale. Financial markets were clearly signalling that the timing was off, and it was then decided to trim the stake sale further to 3.5%. Then the government got into a regulatory problem because SEBI does not permit a sale of less than 5%. A special waiver was required.
By this time, the market value of the company was also halved, from the Rs 12-14 lakh crore estimated in February to Rs 6 lakh crore. The Modi government will have a hard time explaining how the estimated market value of the company was brought down so dramatically when the stock market hasn’t fallen so much. Shares of much less valued private insurance companies have also not shown any sharp decline in the last two and half months. What changed in two months to force the government to allow LIC’s market value to be halved, as per its own assessment?
Global market conditions have changed quite significantly, attested to by the dramatic net foreign institutional funds outflows of over $16 billion from the Indian stock markets since January. FII ownership of NSE 500 stocks are at a three-year low. This is clearly a fallout of the potentially worsening liquidity conditions globally, accentuated by the geopolitical risks following the Ukraine crisis.
The best course for the government would have been to postpone the LIC stake sale. The secretary in charge of public sector divestment has said on the record that the government will not sell its stake in blue-chip PSUs if market conditions are bad. It is on this very ground that the government has slowed down when it comes to the strategic sale of profitable companies like BPCL, Concor etc. If this is established policy, why is LIC, the most valued insurance company, being treated differently? Should the primary savings vehicle of the Indian people be sold in such a hurry? The government has no convincing answers.