Why divestment in LIC is important for Capital Market?

While the Sensex witnessed a loss of 1000 points on the budget day, a flurry of discussion swirled up with the big bold announcement of the government’s decision on LIC of its size.

Impact of LIC Divestment on the Market

Being India’s largest financial institution, LIC can easily emerge as the country’s top listed company in terms of market valuation once listed on stock exchanges. It holds a market share of 76.28% in terms of the number of policies and 71% in terms of first-year premiums. With this IPO, the retail investors will get a new company to invest in, while mutual funds will have a new promising security option.

Currently, most of the mutual funds are invested into the top 10-15 stocks that generally make up for the majority of the market share and returns. For instance, the top 5 Nifty constituents, comprising 41% of Nifty, gave a phenomenal average return of 28% in the year 2019. On the other side, for the Nifty Mid Cap and Small Cap index, the returns were either flat or negative for the period.

Investments by retail that flow into Mutual funds predominantly come through the route of SIP, pension funds, and insurance. There you do not have the flexibility to hold the liquid money. This makes it mandatory for the funds to be invested in stocks. A good PSU in the capital market gives better investment options to mutual funds by creating a depth to the market. A good IPO is not only beneficial to the government but also to the market and the retail investor, as most of the PSU in the past have given decent returns.

Aggressive disinvestment should be undertaken to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in some CPSEs (Central Public Sector Enterprises). If we take a look at the previously divested CPSEs, it is observed that such moves unlock the potential of these enterprises to create wealth evinced by the improved performance after privatization. There is a clear turn around seen in the wealth generation of these entities. One such example is Bharat Petroleum Corporation Limited (BPCL). Approval for strategic disinvestment of the Government’s shareholding of 53.29% in BPCL led to an increase of around Rs33,000 Cr in the value of shareholders’ equity of BPCL when compared to Hindustan Petroleum Corporation Limited (HPCL). This translates into an unambiguous increase in the BPCL’s overall firm value, and thereby an increase in national wealth by the same amount. Apart from BPCL, Steel Authority of India Limited (SAIL), Bharat Heavy Electricals Limited (BHEL), Maruti and SBI are also a few other CPSEs that performed really well on being disinvested.

Listing of companies on stock exchanges will make LIC more transparent, accountable and efficient, while giving the opportunity to the retail investors to participate in the wealth so created. The government has set an ambitious divestment target of Rs 2.1 lakh Cr for FY21, of which it expects to generate Rs 70,000 from LIC IPO. This is the highest ever divestment target and is likely to attract foreign investment.

Currently, LIC is a 100% government owed entity,.and its market value of LIC is Rs 8-10 lakh Cr, so the diversification of even as much as 5% might come to Rs40,000 -50,000 Cr. This is a huge amount for retail investors to participate and might generate decent returns for investors for long term.