Cabinet approves 20% FDI in IPO bound LIC

In a move that was long on the cards, the government has officially decided to allow foreign investment up to the limit of 20% in LIC and other similar body corporates with a similar ownership structure. This was approved by the Union Cabinet under the automatic route. This is likely to pave the way for a smoother road ahead of its IPO. However, with the Ukraine uncertainty at a new high, LIC is yet to announce the dates of its IPO.

This is an all-encompassing approval. That means; this approval will be applicable for FDI flows up to 20% not only in the case of LIC but also in the case of all other bodies corporate, for which the government may have a similar requirement for disinvestment purposes. While the FDI was never barred, there was lack of clarity on the legal front since LIC is not formed under the Companies Act but under a special statute of Parliament as a corporation. 

The current FDI policy is only explicit about the FDI flows into insurance companies that are incorporated under the Companies Act. This does not apply to special structures like LIC, which is a statutory corporation established under LIC Act, 1956. The FDI ceiling for public sector banks is 20% on government approval route. The problem was that there is no explicit law allowing FDI in LIC.

LIC does not fall into any of the above categories and hence one can infer that no limit is prescribed for foreign investment in LIC under the LIC Act. Hence, the government decided to provide clarity on this subject by allowing foreign investment up to 20% for LIC and such other bodies corporate. To further expedite the entire capital raising process, such FDI has been kept under the automatic route, exactly like the rest of the insurance sector.

It has already been announced that the government will take LIC public in March 2022 by selling 5% stake in LIC IPO. While the interest is already quite high, it is expected that the change in the FDI policy for LIC will ensure that global investors committing funds to the insurer do not face any hurdles while subscribing for the public offer. In addition, other changes to FDI rules engendering ease of doing business have also been cleared.

In the last few years, India has been a sort of magnet for FDI. The FDI inflows into India increased from a level of $45.15 billion in financial year 2014-2015 to a robust and imposing level of $81.97 billion during the financial year 2020-21. This is commendable despite the lag effect of the pandemic. The FDI flows in FY21 were 10% higher compared to the FDI flows in FY20. 

The only big question mark is over the timing of the issue of LIC. It is not yet clear when the dates for the issue will be announced. However, the government continues to exude confidence that the issue will be completed in FY22 itself, which is gratifying.

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