A consideration that’s been going on since August 2021 has finally reached its conclusion with the Cabinet approving up to 20% Foreign Direct Investment (FDI) in Life Insurance Corporation (LIC). The approval comes through the automatic route, which is said to facilitate LIC’s upcoming Initial Public Offering (IPO).

With LIC being the biggest player in the Indian insurance sector, and the IPO listing being remanded the ‘biggest-ever public offering’, the Government has already filed the updated draft papers with Securities and Exchange Board of India (SEBI). The corporation also provides discounts over floor prices for its existing employees and policyholders.

An international actuarial firm mentions that, as of September 30, 2021, LIC's embedded value (which is a measure of the consolidated shareholders value in an insurance company) has been pegged at about INR 5.4 trillion according to the draft red herring prospectus (DRHP).
While the DRHP did not disclose LIC’s market valuation, it is usually 3x (3 times) the embedded value, calculating per the industry standards. This would bring the insurer company’s valuation around the INR 16 trillion mark.

Initially to be launched in March 2022, the LIC IPO is now slated for 12 May 2022, owing to the international conflicts that have rendered the stock markets highly volatile at the moment.

Reasons behind FDI approval for LIC

The move was considered by the Department of Promotion of Industry and Internal Trade (DPIIT) after much deliberation with the Ministry of Finance. It is aimed at easing the listing of the state-run insurer company.

The allowance of FDI into LIC also aims at facilitating foreign investments in India through various policy reforms. At present, FDI inflow in India stands at US$81.97 billion (FY 2020-21) as compared to US$ 45.15 billion in FY 2014-2015.

Further, the FDI allowance is also part of the Government’s disinvestment target of INR 2.1 lakh crores. The disinvestment of LIC alone is purported to produce a return of approximately INR 70-80 crores.

Effects of the move on Stakeholders

Permitting Foreign Direct Investment in LIC would open the gates to the participation of pension funds and other strategic investors in the corporation’s IPO offering, claimed to be India’s largest-ever offering.

Further, with insurance being such a sensitive sector, permitting FDI in LIC would bring a sufficient shift for the insurance company. Let’s take a look at the implications of such an amendment for LIC and as well as its stakeholders.

For LIC

The insurance company, while owned and controlled by the Government at the moment, would have the opportunity to transform into a foreign-owned and controlled company. It would also bestow powers upon a foreign entity to appoint majority directors, and control policy and management decisions of the organization.

The foreign direct investment in LIC will also boost India’s insurance penetration which stands at 3.76% at the moment, as compared to a global average of 7%. LIC would open up gates for new growth opportunities with access to foreign capital. Permitting 20% FDI policy would attract foreign insurance companies and their expertise, paving the way to bring in ‘patient capital’.

While the insurance company stands at a profitable stage with the FDI allowance, it is also essential to consider the implications of these reforms upon its promoters and policyholders.

For Promoters

Since the insurance industry demands a huge amount of capital influx, it often requires big players such as business houses and financial institutions to act as promoters. While these organizations set foot in the industry with a strong financial hold, a long-term investment becomes tiring owing to the constant needs of the industry. A similar situation was faced by Start Health and Allied Insurance when three of its five investors were looking out to exit the venture in 2017.

Allowance of foreign direct investment in LIC would give these promoters the leverage to either make a complete exit or lower their stakes in the corporation’s ventures. It would further provide respite to several state-owned banks that depend on the Government for their regulatory financial requirements to be met.

For Policyholders

A 20% FDI allowance will precipitate global best practices in India. This would lead to increased competition and better policy pricing structures by the insurance company. Hence, policyholders will enjoy more options to choose from, better customer services, and fast-tracked claim settlements.

Increased FDI inflows is supposed to supplement domestic capital, technology transfer, skill development for accelerated economic growth and development across sectors.
 

Conclusion: FDI Policy, SEBI Rules and LIC

The current Foreign Direct Investment Policy permits 74% foreign investment in the insurance industry through the automatic route. While it applies to all corporations within the industry, LIC stands as an exception to the rules. The reason, prima facie, is that the insurance company is administered through a separate parliamentary legislation named the ‘LIC ACT, 1956’.

As regards the SEBI Rules, a public offer entails both Foreign Portfolio Investments and Foreign Direct Investments. However, the existing LIC Act does not deal with foreign investments of any kind, calling for a need to position the upcoming LIC IPO according to the SEBI Rules on foreign investments.
 
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