Please refer to our earlier statement on LIC here.
Based on the further developments, we are issuing another statement because of the National Importance.
First, We wish to reproduce below the prophetic words of Shri C D Deshmukh, the eminent Finance Minister who had the vision to create the LIC in 1956:
“The concept of trusteeship, which should be the cornerstone of life insurance, seemed entirely lacking (in private insurance companies). Indeed, most management had no appreciation of the clear and vital distinction that exists between trust moneys and those which belong to joint stock companies.”
“The (insurance) business must be conducted with the utmost economy and with the full realisation that the money belongs to the policyholder. The premium must be no higher than Is warranted by strict actuarial considerations. The fund must be invested so as to secure the maximum yield for the policyholders that it may be possible to secure, consistent with the safety of the capital. It must render a prompt and efficient service to its policyholder and by its service make insurance widely popular. Finally, the management must be conducted in a spirit of trusteeship”
“Insurance is an essential social service which a welfare State must make available to its people and the State must assume responsibility for rendering this service once it is clear beyond reasonable doubt that it cannot be provided in any other manner…. So, while it is the failure of the general run of insurance companies to live up to the high traditions demanded of them that has led the Government to take this step, I would like to emphasise that nationalisation in this field is in itself justifiable. With the profit motive eliminated, and the efficiency of service made the sole criterion under nationalisation, It will be possible to spread the message of insurance as far-and as wide as possible, reaching out beyond the more advanced urban areas and into hitherto neglected, namely, rural areas.”
“The investments would be made, it is needless to say, primarily in the interest of the policy-holders to whom the money belongs, but the interests of the community at large which would be vitally affected by the manner in which these vast sums are utilised and invested would be an equally important consideration…… Incidentally, it might be noticed from clause 28 that at least 95 per cent of the surplus disclosed is to be allocated to the policy-holders. And 5 percent to the share-holders, that is, the Corporation. This is only the minimum, and I am sure later on this proportion could be increased with the result that the State’s share will be correspondingly reduced.”
The then Prime Minister Nehru and the then Finance Minister Deshmukh, whose foresight and vision had led to the creation of a unique institution of the LIC as a social security provider for the disadvantaged people of the country with such a vast reach, would never have imagined even remotely that their successors six decades later would wantonly dismantle it without batting an eyelid, a truly disappointing commentary on the evolution of statesmanship in the country.
- LIC was set up with an equity capital of Rs.5 crore in 1956. There is no additional infusion of funds by the government.
- The LIC was asked to pay compensation to the insurers whose business was nationalized in 1956. As on 31/3/1996, the total compensation distributed came to about Rs.5.215 crore, a sum in excess of the capital invested by the government.
- The entire expansion of LIC was done through the funds of policyholders. The policies participating in the profits were getting a share of 95% of the surplus both from the participating policies as well as from the non-participating policies. The Government share was 5%.
The Solvency Margin shows how the Policy Holders have served as shareholders.
An Analysis of the Solvency Margin of LIC & OTHERS
Life Insurers have to keep a Minimum 150% of the Required Solvency Margin as per IRDA
(Compiled from various reports available in the public domain)
- It automatically means that the participating policies were sharing the losses if any incurred from the non-participating policies in the same ratio.
- In order to make LIC comply with the General IRDAI regulations, the government amended the original Act in 2011 which became effective from 13/1/2012.
- The impact of these amendments: (a) Increase in capital from Rs.5 crore to Rs.100 crore. Any further increase should be done only through the approval of the Parliament. (b) Section 28 was amended affecting the surplus distribution pattern. The share of policyholders was reduced from 95% to 90% and the Government share increased to 10% from 5%. There was no bifurcation of funds into participating and non-participating. This meant that the entire surplus distribution was to be in the ratio of 90:10. However, this was not implemented and till 31/3/2021 the distribution pattern remained 95:5.
- The amendments brought to LIC Act through the Finance Bill changed the surplus distribution pattern. The amendment made to Section 28 impacts the participating policyholders profoundly. The surplus distribution to participating policies was reduced to 90% with the shareholder getting 10%. The profits from non-participating policies will entirely go to the shareholder.
- The impact can be seen from the fact that the Embedded Value of LIC determined as at 31.3.2021 when it was maintaining a single fund is Rs.1.04 lakh crore. This is the value of the shareholder from the business of LIC. This drastically changed with the separation of funds into participating and non-participating, and LIC was valued again as on 30/9/2022. The embedded value increased to Rs.5.4 lakh crore. This is a clear indication that the shareholder has gained at the cost of policyholders with the change in distribution pattern.
- Composition of LIC policyholders: As per the Draft Red Herring Prospectus filed with SEBI, 28.89% of the individual policyholders earn an income of less than Rs.1 lakh annually. 43.03% of individual policyholders earned between 1-2 lakh annually. This means that nearly 72% of LIC individual policyholders have an annual income of only up to 2 lakh. The percentage may be much higher in group policies, as large number of lives insured here are from the weaker sections.
- With these income levels, these policyholders cannot take risk of investing in unit liked policies. Since the shareholders get much bigger profits from non-participating and linked policies, LIC has to concentrate on this line of business.
- There is a clear shift in the business model of LIC. As of 31/3/2021, the share of participating policies was 73.25% in the total policies. This came down to 61.67% as on 30/9/2021. Consequently, the share of non-participating policies increased from 24.82% to 37.02% during this period. Such a shift will hurt the interest of the small risk-averse policyholders.
- 48.22% of LIC Agents are from rural areas. The rural business of LIC as a percentage of total business is 21.46% in terms of number of policies and 15.69% in terms of premium income. The shift in business from participating to non-participating and targeting high sum assured policies will impact the rural population.
- INVESTMENT: 62% of LIC investments are in Central and State Government Securities. 24.77% are in equities and the balance are in Debt/Debentures/Loans and other approved securities.
- LIC invested 142469.29 Million Rupees in 2019 – 430564.90 Million Rupees in 2020 and 226531.80 million rupees in 2021 in Power, Road and Bridges and other infrastructure. In the area of Corporate Debt 50.17% (Rs – million 1599129.82 is invested in infrastructure projects. Similarly, in Housing the investment of LIC is 12.42% (Corporate Debt) amounting to Rs (in Million) 395844.41.
- The total investments made by LIC during the five-year plans are as follows: LIC’s Contribution for FIVE-YEAR PLANS
- The funds mobilized by LIC were being invested in areas which would benefit the entire society. There are indications that LIC will concentrate more on unit-linked policies where the mode of investment will be decided by the policyholder rather than the institution. It may be noted that 52.30% of the funds mobilized through unit-linked policies are invested in equities.
- The LIC IPO will impact:
(a) fund mobilization for socially oriented and infrastructure schemes.
(b) The shift in business strategies will deprive the weaker sections of social security which a LIC policy provides. The rural business may also suffer.
(c)The change in the distribution of surplus pattern for the existing policies is in contravention of the contractual obligation of LIC.
Now, with the proposed IPO the Ministry should look into the following:
- LIC’s surplus funds, built over the past several decades, belong to its policyholders, who for that reason are the de facto owners of the Corporation, along with the government, which is its 100% equity share holder by way of a nominal equity investment. In contrast, instead of the policyholders being treated as the true owners of the LIC and therefore deemed to be the majority “equity holders” in that sense, as and when the LIC is to be divested, the IPO provides them a highly restricted investment window of only 10%. Of course, this window provides a token 10% discount.
- The bulk of the Life Fund of the LIC, which legitimately belongs to the policyholders, has been unjustly earmarked for the future private equity buyers, as when the IPO is to be floated. This implies the bulk of the policyholders’ funds being unjustly misallocated to the account of the stock market investors.
- Even for policyholders investing through the highly restricted policyholders’ window to become equity holders, there is a cumbersome process prescribed, which requires linking their PAN cards with their Aadhar cards and thereafter opening their respective demat accounts. Except a few policyholders having the necessary wherewithal to be able to fulfil this requirement, the majority of the policyholders who largely belong to the disadvantaged sections (SCs/STs/OBCs) are unfortunately left out of the race. It amounts to the IPO filtering them out unjustly.
- This is exactly the reason that has led to many unethical benami moneyed investors exploiting the smaller policyholders by profiteering at their cost, by offering them crumbs in exchange for helping them to link their policy accounts with PAN and Aadhar and open demat accounts. This implies an outright infringement being committed of the policyholders’ privacy rights, misappropriation of their personal details and profiteering at their expense.
- Whereas the policyholders’ investment window has been unjustly restricted to 10%, the MOF has opened up a 20% window for foreign investors. As if this is not enough, the MOF is also reported to be seeking investments from the sovereign wealth funds owned and controlled by foreign governments, which opens an outlet for the latter syphoning of the hard-earned savings of the policyholders to overseas destinations, a prospect that ought to cause nationwide distress. The IPO is thus not in the national interest.
In other words, the injustice meted out to the policyholders is five-fold, (i) policyholders’ funds being misappropriated for generating returns to affluent, speculative stock market investors, (ii) instead of treating the policyholders as the dominant de facto owners of the LIC, a measly 10% window of investment is provided for them, (iii) the cumbersome procedure prescribed for the policyholders to become eligible for investing through their 10% window makes it nearly impossible for the small policyholders to take advantage of it, (iv) as if to add insult to injury to the policyholders, a 20% window for foreign investors is provided; the MOF is even seeking foreign sovereign wealth funds to invest, thereby allowing the latter to profiteer at the expense of the policyholders and syphon of their hard-earned savings to foreign destinations and (v) benami investors being allowed to poach illegally on the small policyholders’ accounts, rent out their accounts and personal data for a song and profiteer at their cost.
- Benami investors renting out the small policyholders’ accounts, if it is established, would amount to a fraud committed on the policyholders and infringing their privacy. We refer to a recent news report on this but these fraudsters seemed to have been poaching the small policyholders’ accounts since January 2022 or even during the second half of 2021, as evident from an earlier news report!
The details of their modus operandi are available from this January report.
“To corner this discount quota shares, brokers are willing to pay anywhere between ₹2,000 and ₹4,000 to LIC policyholders to open demat accounts and rent it to them for IPO application, market sources told Business Line. Since many of these brokers also double up as LIC agents they have ready access to policyholders’ databases. The fee could even increase after the details related to the IPO price band becomes clear. Funding for the IPO application will be given by brokers, sources say. ….LIC has over 32 crore policyholders and brokers are expecting to tap at least 5-10 percent of this pool, who they believe have no demat accounts so far. Large brokers have even started issuing newspaper advertisements to attract LIC policyholders to open demat accounts with them“.
This raises the following important questions to which the MOF should provide answers.
Apparently, benami investors have been poaching on the small policyholders’ accounts since the second half of 2021. Have not these reports come to the MOF’s attention? What action has MOF taken on these reports?
- DIPAM and the LIC have triumphantly proclaimed again and again that there has been a flurry of demat accounts opened by the policyholders. Out of the total number of such demat accounts, how many have been opened by benami investors acting clandestinely on behalf of the policyholders? Have DIPAM/ LIC devised a fool-proof system to make sure that only genuine demats are opened in the name of the policyholders? How has the LIC remained a passive spectator while its true owners, namely, the policyholders are being openly exploited?
- What is the role of the Insurance Regulatory and Development Authority (IRDA) in all this? IRDA’s primary responsibility is to safeguard the policyholders’ interests. Has IRDA failed to discharge that responsibility? Is the MOF indirectly responsible for this by allowing IRDA to remain headless when the LIC IPO had been submitted for clearance?
- Are MOF/ DIPAM/ LIC proceeding ahead in an undue hurry to push through the IPO without applying their minds to the distressing aspects listed above?
- Transferring the bulk of the Life Fund, primarily comprising the policyholders’ hard-earned savings, to the stock market investors including the foreign investors amounts to the government breaching the trust reposed in it by the policyholders. In addition, the very idea of the government divesting a portion of its 100% equity to private investors would also amount to relinquishing its legitimate role as a trustee, a prospect that violates the legislative intent of creating the LIC in the first instance. Has the MOF applied its mind to these crucial aspects at all?
- The entry of stock market investors including the foreign investors, who are primarily profit-seekers, would inevitably necessitate a fundamental change in the role of the LIC, a shift from its erstwhile role of a social security provider to that of a mere profit generator benefitting a handful of speculative investors. Has the MOF thought about this at all? Has the MOF informed the Cabinet and the Parliament of this and its likely repercussions for the disadvantaged sections of the society?
Apparently, the LIC IPO has been mooted without the MOF exercising due diligence, a fact that has so far not come to the attention of the Parliament. In our view, to float such an IPO would not serve even an iota of public interest and it deserves to be revoked forthwith.
As far as the fraud being committed on the small policyholders is concerned, especially the reported benami renting out of their accounts, it calls for an independent judicial enquiry, pending which no further steps should be taken to proceed with the IPO.
The more recent news reports on the manner in which your Ministry is indiscriminately proceeding in the matter indicate a total surrender on the Finance Ministry’s part of the policyholders’ funds to large foreign investors such as Abu Dhabi Investment Authority, Singapore-based GIC, three Canadian pension funds and Qatar Investment Authority among other sovereign wealth funds.
Most of these sovereign wealth funds, as the name suggests, are controlled by the foreign governments, who are more interested in maximising the short-term returns to those funds than the long-term well-being of the vast disadvantaged sections of LIC’s policyholders. It is the latter that has elevated the LIC to its present glorious height by putting in their hard-earned savings, which are now being nonchalantly handed over to these newcomers from foreign lands. MOF is reported to be seeking relaxation in the lock-in period for large investors (), which promotes speculation, and profiteering by investors. This will help the anchor investors and the benami investors to bid low initially and skim off a portion of the proceeds that ought to accrue to the government.
The Finance ministry also owes an answer to the nation on the following questions.
- Would such deep-pocket foreign funds and foreign investors care about continuing the LIC as a unique social security provider for the marginal households in the country?
- Would not opening the doors of the policyholders’ Life Fund to foreign investors imply allowing the latter to syphon off a significant portion of the policyholders’ funds to overseas destinations?
- Would not these overseas investors and the affluent domestic investors insist on the LIC gradually moving away from its role of not only as a social security provider but also as a dominant lender of funds for financing the States’ infrastructure and their social sector schemes?
- Does this not imply that, by divesting its own equity share that symbolises its trusteeship relationship with the policyholders and its welfare mandate under the Constitution, the government would be relinquishing its statutory role that was envisaged when the LIC was created by the Parliament more than six decades ago?
- Would not divestment of the government equity shares also lead progressively to the stock market investors pressurising the government into diluting the sovereign guarantee provision under Sec 37 of the LIC Act? If it were to be so, would not the LIC be then progressively withdrawing its reach from the rural and the remote areas, and the smaller households, a prospect that was never envisaged when the legislature created the LIC?
- By classifying a large number of policies as non-participating policies are you not decreasing the return to the policy holders ? Will it not drive away the small policy holders?
A major portion of the solvency fund was contributed by policy holders and not by the share holders. How can you take away their rights?
- Day by day the newspapers are reporting that the return expected is getting reduced. From Rs. 75000 crores it has come down to Rs.30000 crores. For this meagre amount should we meddle with a golden goose?
- LIC being a mutual benefit trust demutualisation has to be done. Why this has not been done yet?
- The valuation of LIC by a foreign company is shredded by secrecy and transparency is missing. Is it not true that the value of a unique giant cannot be done using conventional methods?
We appeal to the Prime Minister and Finance Minister to first reply to all these questions and immediately STOP the IPO and have a wider, transparent discussion with all the stake holders.
Commission Members and Coordinators.