People’s Commission demands a pause on LIC IPO

Insurance Regulatory Development Authority (IRDA).
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Concerned about the rushed attempts of the Centre to dilute a portion of its stake in the public sector life insurance behemoth Life Insurance Corporation (LIC) to list it in stock exchanges, civil society group People’s Commission wrote to Cabinet Secretary Rajiv Gauha on February 14, 2022. The discussion forum asked the Ministry of Finance to stall the rushed proceedings in the matter until a new Chairperson is appointed for the Insurance Regulatory Development Authority (IRDA).

Member E. A. S. Sharma wrote about how the Department of Investment and Public Assets Management (DIPAM) continues to the issuance of the Initial Public Offer (IPO) that requires clearances from the IRDA and the SEBI as a part of the disinvestment exercise. However, the previous Chairman S. C. Khuntia retired on May 6, 2021. Since then, this position has remained vacant for more than eight months, although the Ministry had been planning to disinvest the Corporation well before Khuntia’s retirement.

The Commission said this suggests that the government is trying to weaken regulatory oversight over the proposal to allow a speedy process. Similarly, the IPO seeks to dilute public control over the enormous wealth of household savings in the country and progressively transfer it to a handful of the elite.

“The DIPAM is trying to rush through with this process, so as to be able to have the IPO finalised well before the end of March, 2022. We feel concerned about the hasty manner in which DIPAM is proceeding in this matter, unmindful of the long-term societal implications of the proposal,” said Sharma.

The LIC is the single largest social security provider in India for the disadvantaged sections of society. Its small policy holders played an especially pre-eminent role in contributing immensely to LIC’s growth over the last several decades. Members argued that policy holders single handedly contributed to funding the LIC without having to seek any significant financial support from the government and have a legitimate stake in the corporation’s affairs.

“At best, the sovereign guarantee provided by the government to LIC’s policy holders may be notionally valued and reckoned as a part of the equity capital,” said the letter.

Further, it warned that the same should be reflected appropriately in the equity capital base of the LIC. Otherwise, private investors gain undue control over LIC affairs, to the detriment of policy holders, most of whom are small ticket investors who have already invested their household savings.

Yet, the Ministry of Finance allowed the IRDA to carry on its regulatory functions over the insurance business, without a regularly appointed Chairman, as required under Section 4 of the IRDA Act.

“The fact that a headless IRDA will now be considering the draft IPO proposal for the disinvestment of the LIC erodes the credibility of the exercise. Had there been an IRDA fully constituted, it would have, in all likelihood, turned down the draft IPO proposal that deprives the policy holders of what is legitimately due to them,” said Sarma, who has apprehensions that the Centre’s proposal to allow both domestic and foreign investors to buy LIC’s equity, though limited in the first stage, will start an unfair process that deprives policy holders of their legitimate share in the equity base. This will also alter LIC’s objectives as India’s largest social security cover provider.

Moreover, he condemned the government move to open a meagre 10 percent share of the LIC for policy holders to “mislead them into silence”. Arguing that this share bears no relationship to people’s legitimate status as the largest stakeholders in LIC’s growth, Sarma said, “A proposal such as this one that places the policy holders who are the largest stakeholders in the LIC at an unfair disadvantage vis-a-vis the small segment of the elite investors of the stock-markets, is prima facie violative of the principles of natural justice and as such, is patently illegal.”

Regarding the IRDA, the Commission said the Parliament had enacted the IRDA Act in 1999 specifically for safeguarding the interests of the insurance policy holders. Accordingly, its Preamble reads, “To provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalisation) Act, 1972.”

This means that protecting LIC policy holders interests is the primary objective of regulation by the IRDA. For this reason, the People’s Commission urged the independent statutory authority to examine the government proposal with utmost diligence.

“Not taking the policy holders and the public at large into confidence, who cannot compete with the few elite stock-market investors, would amount to disregarding the public interest for the sake of an elite segment of the investors in the stock-markets. The IRDA has the statutory obligation to protect the interests of the public at large as well as LIC’s policy holders, who are notionally the dominant shareholders of the Corporation,” said the letter.