New Delhi, February 26: The Indian government's proposed IPO of state-owned Life Insurance Corporation of India (LIC) will improve the accountability and transparency of the country's largest insurer and benefit the insurance industry, said Fitch Ratings.
The benefits of the IPO may trickle down to the entire domestic insurance industry in terms of attracting more foreign interest, which could result in an increase in foreign capital inflows into the industry, said Fitch.
Fitch expected the IPO, once executed, may also encourage some of the other private sector insurance companies to list some of their shares in the stock market over the medium term, although the current insurance regulation does not require all insurers to be listed publicly.
The government proposed on February 1, 2020 to issue shares in LIC through an IPO to meet its highest ever disinvestment target of Rs 2.1 trillion, set in the union budget for 2020-2021. LIC has a premium-based market share of almost 70 per cent in the life insurance sector.
A publicly listed LIC will be subject to stringent disclosure requirements stipulated by the Securities and Exchange Board of India. This will create a strong culture of compliance and accountability within the insurer.
“We think the insurer's investment allocation decisions will be rationalised too, as major investment decisions could be subjected to additional scrutiny and approvals,” Fitch said.
LIC is one of the prominent institutional investors in several public sector assets, and in multiple instances has obtained exceptions from the insurance regulator to increase its stake in investee companies above the regulatory ownership cap of 15 per cent.
“In addition, we believe that the proposed IPO, once executed, could broaden the insurer's capital base and improve its regulatory capital position, which was 160 per cent at end-March 2019, slightly above the regulatory minimum of 150 per cent,” Fitch analysed.
Fitch expects the state to reduce ownership only marginally in the insurer in the near term, but could gradually reduce the stake over the long run to meet the minimum public holding requirement for listed companies.
In 2019, the government proposed to increase the minimum public holding requirement of listed companies to 35 per cent from 25 per cent, although many listed public sector companies are yet to comply with the 25 per cent requirement.
“However, we view the procedural and legal bottlenecks in terms of amending certain sections of the LIC Act, conducting independent valuations as well as obtaining regulatory approvals may delay the execution beyond the government's target deadline of end-March 2021,” Fitch added.