Finance Minister Nirmala Sitharaman made a massive announcement about disinvestment of Life Insurance Corporation (LIC) holdings during her speech at the Union Budget session in the Parliament on Saturday, February 1.
The Union Finance Minister exclaimed that insurance behemoth LIC will be listed by the government as part of its disinvestment initiative. She further stated the listing the insurance giant will bring more 'financial discipline'.
In a move that proposed to sell a part of the government's holding in the firm by an initial public offering (IPO), the Union Minister also supported her statement saying, the government will ensure a mechanism to address NBFC's liquidity shortages and house finance corporations. However, the Minister did not reveal the percentage of holding it would sell. Notably, currently, the government owns 100% stake in the company.
Being the largest institutional investor in the country, LIC is an important participant in the divestment process of government entities, which had previously announced disinvestments in five public sector undertakings (PSU) after the Cabinet's approval in 2019.
A hard line to debate, there are factions and notable economists around the world who argue that the 'government has no business to be in business'. The LIC was originally identified as a candidate for potential public listing by the government in 2019, shortly after PM Modi was elected to office with a resounding mandate.
LIC is India's largest financial institution, it could have easily emerged as the country's top listed company in terms of market valuation overtaking current industry giants such as Tata Consultancy Service, Wipro, Mahindra and Reliance Industries, if its shares were listed on the stock exchanges.
Public listing of LIC will lead to more disclosures of investment and loan portfolios, as well as better governance, transparency and accountability. Adding to this, with new powerful players in the market eating away at LIC's domestic market hold, the company's performance been an area of deep concern for its management. Reports mention that its share fell by nearly 66% in 2018-2019 financial year.
A leading news daily in the country reported that LIC's investment in PSUs had reached a record 85%, while private investments only accounted for a meagre 15%. The PSUs in extension funded a variety of private and public companies such as HDFC Bank, Tata Motors, Mahindra, Dr Reddys, Hindustan Unilever, Infosys, ACC, Maruti Suzuki, Asian Paints, ITC, Bharti Airtel, L&Tm SBI and many more.
Selling part of its stocks through an IPO would improve the valuation of the company. The higher valuation when the govt decides to sell its stock will also ensure that more equity capital and investments are observed. The government on many occasions has raised calls for need to disinvest in large PSUs in order to limit liabilities but has always stopped short of going the full length whenever necessary. In more ways than one, this could be a boon for the country's ailing economy.
Disinvsting in PSUs implies that failures and underperformance of several leading PSUs does not take a toll on the government as it continues to lift them up, every time they fail, as in the case of Air India. With economies changing drastically, Nehruvian principles of nationalising large entities will only add further stress to the Centre's coffers.
PSUs were only meant to extend support to struggling industries immediately after independence, its hold over the economy was always meant to gradually decrease as the manufacturing industries evolved and generated more revenue potential for banking and finance institutions.
Phasing out PSUs with Private stakeholders can provide better and cheaper goods and services. Governments since then have banked on that idea either fully or partially in many of its investments. The divestment of a loss-making PSU sends out a message and that is the importance of accepting privatisation and individual businesses playing an active role in the country's GDP growth.
Nirmala Sitharaman flagged off her Budget speech by giving three takeaways that would summarise the forward-looking budget for the upcoming year 2020-2021. She stated, 'The Budget is woven around three prominent themes, namely Aspirational India, Economic development, and lastly, a caring society.
This year's theme poses tremendous significance as the Indian economy continues to reel in multiple challenges, namely in the form of inflation, unemployment, farmer distress and a dip in GDP growth. The Finance Minister, while beginning her Budget speech, said the focus would be on increasing incomes and elevating purchasing power.