Govt to take steps for more robust financial sector

I BOLD MOVE LIC listing, IDBI Bank stake sale tops agenda

The Budget has a slew of steps for the financial sector, including listing on the stock exchanges of Life Insurance Corporation (LIC). And, a fivefold increase in insurance cover for bank depositors, to ~500,000 each.

The finance minister said the government now proposed to sell part of its 100 per cent holding in LIC, via Initial Public Offer. The overall disinvestment target that was specified would essentially come from this listing of LIC and stake sale in IDBI Bank, said Rajiv Kumar, finance secretary, at a post-speech press conference. There are three listed life insurance companies — HDFC Life, SBI Life and ICICI Prudential Life Insurance — and three listed non-life insurance entities.

Kajal Gandhi, analyst at ICICI Direct, said being a state-owned entity, LIC is likely to see a valuation gap versus private players. At even 25-30 per cent of its assets under management, the company could be valued at ~8-10 trillion. Even a 10 per cent dilution will be difficult for the market to absorb in one go and the government might do this in stages.

The larger question is whether the government would continue with the sovereign guarantee which comes with full ownership. If it does, there would be questions on corporate governance. And, with listing, the government cannot fund various organisations like they have done so far with LIC, notes corporate lawyer Ashvin Parekh. “This (listing) is being talked about since 2005. The government was then concerned because LIC had issued a lot of guaranteed return products and there were doubts about its solvency. At

that point, LIC had capital of ~5 crore and the government clarified that all the liabilities of the products issued by LIC had a sovereign guarantee. As of now, LIC has capital of ~200 crore,” Parekh said.

The government will also infuse ~6,950 crore for recapitalisation of the insurance companies it owns, to meet regulatory requirements. It has begun to consolidate the three state-owned non-life insurance companies and later list this consolidated entity.

On bank recapitalisation, the minister noted what had been done over recent years to strengthen the system; there is a need now for more private capital, she said. Accordingly, it is proposed to sell the balance holding of the government in IDBI Bank to private, retail and institutional investors. Though there is no specific outlay for capital infusion in public sector banks, support would be extended if required, she added. To address liquidity constraints at non-banking finance companies (NBFCS) and housing finance companies, a mechanism will be devised, by guaranteeing securities floated for this purpose. After the previous Union Budget, it had formulated a partial credit guarantee scheme for NBFCS. The limit for NBFCS to be eligible for debt recovery under the SARFAESI Act of 2002 is proposed to be reduced from ~500 crore to asset size of ~100 crore or the loan size from the existing ~1 crore to ~5 million.