Valuation of LIC- Need for transparency

Smt Nirmala Sitharaman
Union Finance Minister
Dear Smt Sitharaman,
I understand from news reports that the LIC IPO is going to be issued shortly.
Keeping in view the fact that it is the millions of policy holders of the LIC who have contributed to the Corporation’s phenomenal growth over the decades, some of us feel that relegating their interests and stake in the LIC to the background and offering the so-called “equity” shares to private investors including foreign investors, would be highly imprudent and inconsistent with the role of the LIC as an instrument of the State to provide social security to the disadvantaged.
The so-called “equity” created by your Ministry just to hand over the public sector insurance giant to a few profit-seeking investors does not strictly stand to reason.In my view, it is nothing but a fictitious idea. It does not reflect the policy holders’ contribution to the LIC.
In this connection, I feel concerned about the manner in which LIC is being “valued” for the purpose of the IPO.
I understand that your Ministry has appointed a private consultant to undertake the valuation of the LIC and according to the latest reports (, the estimated value of the public issue is Rs 15 lakh Crores and the so-called “embedded value” (the statistical measure of investors’ interest in an insurance companyof the Corporation is Rs 4 lakh Crores. The methodology of valuation, the assumptions that have gone into it, the factual information considered by the valuer etc. have not been divulged in the public domain. It is unfortunate that the policy holders of the LIC and the public at large should get information on this, only through rumours and gossip. If your Ministry proposes to keep the public in the dark about such information, I am afraid that the entire LIC disinvestment process will stand vitiated, as it violates the letter and the spirit of Article 19 of the Constitution, which provides for transparency in governance.
It is now widely known how your Ministry has miserably mishandled the disinvestment of the Central Electronics Ltd. (CEL). In that connection, my letter dated 20-11-2021 addressed to you on the CEL refers (]. Of course, I have not received any reply from your Ministry to that letter.
Please recall how your Ministry had grossly undervalued such a highly competent, valuable CPSE as the CEL, at a rate several orders of magnitude less than its intrinsic value and how your Ministry had almost sold the company away to a private firm of questionable antecedents, till CEL’s employees, eminent scientists and a civil society group, the People’s Commission, raised their voices against it. It is equally unfortunate that your Ministry should nonchalantly handle such an important matter as the disinvestment of a strategic CPSE so casually and that it should get exposed only when the civil society had expressed its shock and dismay! I get the feeling even at this stage that, by ordering an internal, departmental enquiry into the CEL matter, the Centre is only trying to obfuscate the contentious issues that revolve around it and delude the public.
Having burnt its hands thus in the case of the CEL, your Ministry should be far more circumspect in embarking on yet another questionable adventure of selling a highly valuable institution, this time, an insurance behemoth such as the LIC of critical socio economic importance, in a casual and indiscreet manner. In case your Ministry insists on rushing through with the sale of the LIC equity as a prelude to its further disinvestment, I am sure there will be serious public concerns about how your Ministry has determined the embedded value of the LIC and why it is ignoring the policy holders’ stake in it, with the narrow intention of handing it over to a few profit-driven investors.
Prima facie, it appears to me that the value of the Corporation at Rs 15 lakh Crores and its embedded value of Rs 4 lakh Crores is a gross underestimate, considering the vast, highly valuable land assets that the LIC possesses today across the length and the breadth of the country, the enormous public trust and the goodwill it enjoys as a public sector institution that truly belongs to the millions of its policy holders and its preeminent role in funding infrastructure, housing and the other social sector projects of crucial importance for the society at large. 
There is an important conceptual issue that arises regarding the valuation of the LIC. 
From whose perspective should it be valued
  • Should it be from the point of view of the society at large (“social value” based on social cost/ social benefit analysis and the income distribution implications)?
  • Should it be from the point of view of a handful of domestic and foreign investors, who wish to maximise their short-term profits, without caring to value the enormous societal value of the Corporation?
  • Should it be from the point of view of the government (both the Centre and the States) who have used the LIC as an instrumentality of the State to realise several social objectives, rightly so?
  • Should it be from the narrow point of view of the Finance Ministry that often uses the LIC to leverage the capital market, to bail out other CPSES in times of stock market volatility and even to discipline the markets at the cost of the policy holders?

These are highly contentious issues that a paid consultant with a limited perspective may not be competent enough to understand and address.
In the erstwhile Planning Commission, in which I had the privilege of working at one time, there used to be a Project Appraisal Division (PAD) that had built professional capability to carry out social-cost-social-benefit appraisal of public investments, an exercise that now assumes relevance to valuing the LIC. Unfortunately, the successor to the Planning Commission, the present day Niti Ayog has neither the time nor the inclination, nor the wherewithal, to consider the societal dimension of public investments and public institutions! I wish that the erstwhile PAD’s services are available today to examine the value of the LIC critically.
In a way, the questions that I have raised above on valuing a CPSE have wide ranging generic importance for the disinvestment of any CPSE for that matter. 
I do not think that your Ministry can rush through with the LIC IPO on the basis of a perfunctory valuation exercise, merely to derive limited, illusory fiscal resources. I refer to the disinvestment proceeds as “illusory” because they come from the same pool of domestic savings from which the government also borrows. If you get one rupee of disinvestment proceeds, you will be losing that one rupee which you could readily borrow from the savings pool on much more cost effective terms, as government borrowings are backed by an implicit sovereign guarantee. The only difference that arises when the LIC is handed over to a few investors is that the government would then have dismantled an excellent institution like the LIC in the name of getting such illusory proceeds! I request your Ministry and all others in the government who are concerned about this to ponder over the questions I have raised.
Pending satisfactory answers to these serious public concerns, I suggest that your Ministry puts on hold the entire process of disinvestment of the LIC in particular and the disinvestment of the other CPSES in general, till such time it can find satisfactory answers to the questions I have raised above. Your Ministry cannot summarily brush aside these questions, as the same questions are likely to be asked again and again, by all those who are interested in the long-term well being of the nation, not captive to a myopic vision.
I am afraid that the LIC IPO will turn out to be as contentious as the sale of the CEL, the only difference being that the controversy that will arise in the case of the LIC would be far more serious and far more more questionable, as the LIC’s role is a multi-dimensional one and its resources enormous.
I am circulating this letter to the Comptroller & Auditor General of India (C&AG), as it is that office that should look at the proposed LIC disinvestment and all other cases of CPSE disinvestment and report to the Parliament.
Once again, I request you to be highly circumspect in this matter and take a conscious decision to put the LIC IPO on hold.
Yours sincerely,
E A S Sarma
Former Secretary to Govt of India

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