LIC IPO: Is govt opening itself to charge of indulging in 2G-like scam?

Tearing hurry to go through IPO gives rise to suspicion of favouritism

S MurlidharanUpdated: Thursday, April 28, 2022, 01:41 PM IST
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LIC’s embedded value has come down dramatically and drastically to less than half---Rs 6 lakh crores. | Photo: Representative Image

A scam often reveals itself in hindsight. The infamous 2G scam unlike the coal allotment scam is a case in point. Coal blocks were allotted gratis to actual producers of steel etc. instead of being auctioned was the allegation against the Manmohan Singh government which found resonance with the Supreme Court.

The 2G scam was not such an open and shut case at the very outset. Licenses were allotted on first-come-first-served (FCFS) basis at the prefixed price of about Rs 1700 crore per license which were blithely sold almost back-to-back for about Rs 4500 or so crore per license. The gravamen of the charge was, resultantly, the exchequer and by extension the public lost about Rs 2800 crore per license.

Predictably, the Supreme Court cancelled the licenses with FCFS coming for a ringing condemnation. The minutiae of these two scams are not relevant for the ensuing discussion in hand because only the modus operandi or the alleged cunning game plan is.

In the upcoming LIC IPO (Offer For Sale or OFS would be the more appropriate description of the exercise), 3.5 percent of the shares of LIC are on offer to the public at between Rs 902 to Rs 949 per share runs the risk of being similarly assailed though admittedly the opaque FCFS isn’t at play. To be sure, the bidders will transparently bid within the narrow price band transparently and cut off price would be determined but the nub of the issue is the undervaluation of the worth of LIC.

Has the govt caved in to global investor pressure?

The government, it is alleged, is said to have meekly caved in to international investors’ relentless pressure and applied a multiplier of just 1.1 times its embedded value (net assets value plus future profits) whereas private insurers in India like ICICI Prudential and HDFC have been commanding a multiplier between 2.5 to 3 times.

Till two months ago, the government was confident of asking for and getting an embedded value of Rs 13 to Rs 15 lakh crore. Now LIC’s embedded value has come down dramatically and drastically to less than half---Rs 6 lakh crores.

The Ukraine war, alas, has made all the difference, or has it? It is alleged that Ukraine is only an alibi for gross undervaluation of the family silver. Crown jewels or treasures, namely real estate of LIC, simply do not figure in the calculus is another damning charge against the valuer----the amount thus ignored is estimated to be an astounding figure of $5.8 billion. How could the government have meekly and mutely accepted this devaluation?

What critics say

Trenchant critics anticipate a sequence of events as follows. Powerful Qualified Institutional Bidders (QIBs) who admittedly dominate the price discovery exercise in India would hog a huge sliver of LIC shares on offer at a throwaway price thus deliberately contrived and unload them in the market. The killing they would make would be in the futuristic worldview of scandalous proportions. They will laugh all the way to bank making listing gains as their apprehension.

The parallel between the 2G scam and the putative LIC scam is based on the deliberate underpricing---in the 2G case the licenses were underpriced to allow the allottees to sell licenses for their true worth in return for kickbacks. LIC shares on the face of it also seem to have been undervalued, but the other two ingredients namely ‘deliberate’ and ‘kickback’ may be difficult to prove especially with the government setting store by the advice of the pedigreed Milliman Advisers in valuation of LIC.

Scam or no scam, the bottom-line would be the same----select middlemen pocketed a substantial part of the 2G license fee that should have gone to the exchequer and in LIC the government would have gotten much less than what it should have for its disinvestment of 3.5 percent stake.

The notional loss of revenue is the key phrase which Congress legal luminaries laughed off at the height of the 2G and coal scams. P Chidambaram went to the extent of describing the back-to-back sale of 2G licenses as smartness by nimble-footed investors. Touché!

That the policyholders are going to get a raw deal vis-à-vis the investors appears to be a graver charge against the government than the charge of the exchequer being fobbed-off deliberately for less.

The LIC Act of Parliament mandated that 95 percent of the profits its profits would be available for the policyholders with just 5 percent alone being available to the government for dividend. It is this 95 percent which the LIC distributes to the policyholders as bonus in an equitable manner.

The recent amendment to the LIC Act cleared the decks for public entry and the end of the demarcation of a hefty 95 percent for policyholders. It is alleged that their hurt feelings are sought to be assuaged with a 10 percent reservation for policyholders in the upcoming IPO but critics aver that a customer doesn’t deserve shares as much as she deserves fair dealing. But again, the criticism may be a trifle premature because LIC cannot afford to marginalize policyholders’ interests at the altar of shareholders for the fear of losing business to competition. Let us wait and watch to see how things pan out.

(The writer is a veteran columnist and tweets @smurlidharan)

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