 In a few weeks from now, India's biggest ever initial public offer that of the Life Insurance Corporation of India is about to be launched. Given the scale of the institution, the reputation it has among vast segment of India's population and the consequences it will have for policy holders and for the general public, this becomes a very important issue. Now in the last year, significant changes have been made to the structure and the character of the Life Insurance Corporation of India. So although this is an offer of just about 5% of the stake in the IPO, the consequences are potentially very serious. Now I have with me Mr Amanullah Khan, a veteran employee in the life insurance industry, Life Insurance Corporation of India itself, and former president of the All India Insurance Employees Association, the largest insurance union in India. So what we have had the valuation done by the man and company and it has been estimated at 5.4 lakh crores. Now what does that imply for policy holders and especially in terms of the methodology that has been adopted? Thank you Sridhar. I think LIC is a unique organization. There are two former finance ministers on record, one Mr Pichidambaram who said LIC is a chivalry in the crown. And then we have Arun Jaitli calling LIC as the most important financial institution for the economy of the country. Unfortunately the government is now making hectic preparations for the public offer of LIC. Though the government says that it is 5% of its stake that will be sold initially. We see it as a first step towards privatization and that is why my organization, All India Insurance Employees Association has been campaigning against the LIC IPO. Now the question, how do you determine the value of a corporation which never valued itself? Right from 1956 LIC has been generating surplus and that surplus was being distributed among the shareholder and the policy holder in a particular ratio. It never valued itself. One of the reasons is supposed to be that a conservative valuation gave it protection against future uncertainties. That was one of the logic of not having to value it at market rates. No, it was never valued. So only we were determining actual surplus for the distribution. Now with the government deciding on IPO, the value of the corporation has to be determined. They have appointed a US actuarial firm Milliman Advisors. They net a set value of any insurance company that is what is embedded value and they have determined it as 5.4 lakh crores. Now the reason I asked you about the valuation itself was that the assets of the LIC especially given that LIC is perhaps the biggest realtor in India have been taken at book value. And these don't, if I remember right, it's something like 3,500 crores which is laughable because we know that according to one estimate it is at least the market value of the assets are nothing less than 10 lakh crores. See we do not know what is the market value of the LIC's land and its building but it is a fact that LIC after railways is the largest real estate owner. Now according to our information all the buildings that are self occupied have been valued at book value because they do not generate any profit. So that is why the value of the assets, the fixed assets has come down. So this is one of the issue on which we are agitating as the value of our real estate is much larger many times more than what is assessed now. And it is not right to say that the self occupied buildings have to be valued at book value. Also from an ownership perspective if you say the float is 5% and 5% of this institution is going to belong to somebody then that means they have claims over 5% of all that LIC owns. So notionally this asset should be valued because then somebody is losing if these assets are being valued at such a low price and somebody is getting ownership of that asset then some people are losing and some people are gaining from this. That is absolutely right. See the fact is that unlike any other public sector undertakings LIC has grown and expanded itself through the policy orders funds. The government after the initial investment of 5 crore as equity has never given any additional capital to LIC except to meet the IRDA regulation in 2011 when another 95 crores were added which was also generated internally. But interesting fact is that in 1956 when the government invested 5 crores in LIC it also passed on the liability of compensating the erstwhile insurance at 245 company that were taken up by the government. Now in fact the value that LIC has paid as compensation exceeds the capital invested by the government. So as on a particular day 5.125 crore was paid as compensation to the erstwhile insurance and all that has been done through the policy orders funds. So now we feel that the government which did not create the value it is the policy orders value which is being appropriated by a few rich people in the country and that is the tragedy that we have. Can you just explain what are the consequences for policy holders? If they are the ones who have contributed to the growth I mean almost all of the growth has been generated from policy holders funds. In what way does this IPO attack their interests? See in 1956 when LIC was established the finance minister on the floor of the parliament CD Deshmukh he said that with the nationalization the concept of profit goes out and the service comes in and LIC has to serve the people and make the insurance available and at the same time through mobilization of the small savings help the national development. Now the scheme of thing was that which was nowhere else in the world you can find is that whatever surplus actual surplus is determined 95% of that was going to the policy orders and 5% was going to the government. And interestingly any insurance company including the life insurance it sells two type of policies one is a participating policy where there is no guarantee of a future return and a non-participating policy where guarantees are given for the return. So the participating policies participate in the profits of the corporation and that is distributed them by way of revolutionary bonus and interestingly in LIC the participating policy holders were also getting 95% of the profits made from the non-participating policy. 95% goes to the government because the entire distribution pattern was 95% out of the total profits earned from the non-participating policies 95% was going to the policy holder and in the same way the participating policy holders were also taking the risk that if there is a loss in the non-participating policies that risk will be borne by the participating. One of the things about the LIC was that it was also in a country like India where what it was doing was that it was providing savings instrument for people especially people from poor average and medium sized incomes to participate in savings which could then be invested in long term investments like infrastructure and so on. See that is the beauty of LIC as said because the people who purchase a policy of LIC they do not take it as a pure risk instrument they also take it as a savings instrument because after all a life insurance company has to cover the risk of dying early and also has to cover the risk of living longer so most of the policy holders were taking it as a savings instrument and when the savings take place smaller savings and today LIC generates as much of between 4 lakhs to 5 lakh crore annual investable surplus so that is invested in the economy and basically it is invested in areas which give benefit to the entire society and that was the objective of nationalization and in fact if you go through the act of 1956 LIC act in many places it says that LIC should act as a trust. So the government's role was essentially that like of a trustee rather than a shareholder in actual practice isn't that? That is right because the entire scheme of things the policy holders were privileged over the shareholders and the way it was set up and the policy holders are taking the risk of losses and helping the expansion of the industry so it was working as a trust and a mutual benefit society. So how is that endangered by the IPO and the changes in the character of the LIC that has been instituted since last year how do these affect policy holders? No the government has brought certain amendments to the LIC act and these amendments have been brought through the finance bill in fact we were contesting that LIC is a special act whether the finance bill can alter this act and we also represented to the Lok Sabha speaker but nothing much was done and in fact by doing that all opportunity for a discussion was denied and now that act has been amended and basically most of the amendments are in relation to the management of the apartment of independent directors and separation of powers between a chair person. A chair person or CMD falling in line with the company but there are two important issues in those amendments. Number one the share capital is increased from 100 crores to 25,000 crores authorized capital. Now the issued capital is 6,325 crores and the second amendment is in relation to the distribution of the surplus. Earlier LIC was maintaining a single fund comprising of money received from both non-participating and participating policies. Now they have been separated and after separation of those funds the amendment to the act also says that the participating policy holders now will get only 90% of the surplus and they will not be entitled to any profit that is generated from the non-participating policies. In fact the draft red herring prospectors when we see it you can see this increase in embedded value from in March 2021 it was about 0.9 lakh crores and it suddenly increases to 5.39 lakh crores in September and that is primarily because of this because now that the full charge is taken over on the non-participating policies is going straight away into the shareholders account and nothing is to go to the policy holders. That's right as at the end of March 2021 it was a single fund because these amendments had not come into effect. Embedded value is that what is the interest of the shareholder so that interest of the shareholder with a single fund came to around 1 lakh 4,000 crores but after these amendments came into effect from 1st of July this LIC was asked to separate the fund participating and non-participating and with the reduction of the share of the participating policy holders to 90% and denying them the returns from the non-participating policies the shareholder interest increased and that is how that as on September the value of the shareholder interest increased to around 5.4 lakh crores. This in fact it is the robbery of the policy holders, the participating policy holders who funded LIC's growth, who contributed to the solvency margin of LIC and who also undertook the risk if there is a loss from the non-participating policies they have been short chained on and that is... So this rather naive argument that there is only a 5% float so it is not going to affect policy holders much what do you say to that? No, see if you read the entire act the government has sanctioned from the parliament to diverse 49% of the shares and looking at the politics and the economics today we know that it is not going to remain that and there will be increasing demand for the government to get out of LIC itself because the prospect to shareholders for them it is not the service to the community it is the profit and the moment the government retains certain control the market always don't grid those companies they don't get the values and a classic example is SBI and HDFC when you look at SBI its market share, customer base and reach and expand is many many times more than HDFC bank but HDFC bank market capitalization is larger than 4 public sector banks put together including SBI so that shareholders if they want their value to increase they want government to step back already you can hear that noise already that noise is coming the LIC chairman has given assurances that it will be a board managed company there will be no government interference and all of that supposedly to assuage fears that it will not behave properly in the market basically no see LIC is board managed but when the government owns the company you can't avoid the interference of the government so in the day to day functioning there is no interference but sometimes the interference will be there on the investment policy and especially in situation where in the last few years if you have seen many of the government went for a disinvestment drive most of those shares did not sell in the market and LIC had to intervene to purchase there including HAL in Bangalore GICRE and then New India and many even ONG said when market was not purchasing LIC was asked to intervene and purchase so the market does not see that as a favorable thing and they want the government to get out of the business so we are sure that government though it assure that it will hold 51% it will not remain for long and we already experience it in the bank and in the general insurance there is already talk that they will be coming to the market again next year for another float the financial history officials have said it no that is possible if you look at the SEBI rules the SEBI says within 2 years you have to disinvest 10% now they are doing a disinvestment of 5% so within the next 2 years they have to disinvest 10% and within 5 years they have to disinvest 25% so that is as per the SEBI rules that the government will because the government is perennially in need of funds so when do you think as a plan when do you think that 49% will be reached according to the schedule? the government is not going to have that easy because of the very value of LIC so whether the market has got the appetite to absorb and even today even with 5% they say that they are going to raise around 65,000 crores much depends on how foreign investors are going to look to LIC and especially in today's when war is taking place between Ukraine and Russia whether the foreign investors would come into India and with inflation rising across the world we have seen that in the last 3 or 4 months most of these foreign funds have gone out of India so whether they are going to invest that is an issue now we spoke about the policy holders now looking at it from the other side from the institution itself what do you think are the consequences for LIC as an institution because of these changes its conduct no we feel very strongly that the foundational objectives of LIC are going to be undermined number one LIC has been ensuring people from across the segments and that is why the premium size of LIC is much less compared to the private sector and private sector has been concentrating on the elite and the high network individuals and when the entire concept is to deliver profits to the shareholders LIC's business model also has to change and already indications are there the officials of LIC and even in the internal discussions within LIC there is a new thrust towards selling the non-participating policies and by selling the non-participating policies it automatically means that you are trying to generate more value for the shareholders so the smaller policy holders who normally do not want these guaranteed written policies which mostly are invested in the stock market like QLIP and all who look to a safe instrument and with them still endowment policy is the favour here so that segment is going to be neglected so the business model is going to change and secondly how the LIC is going to behave post IPO because its spread in the rural areas is something which is unimaginable but the cost of procuring a business from a rural area is high so whether rural area is going to be neglected and the lower size policies are going to be neglected because there is always a what you call as a cross subsidization where we cross subsidize the lower policies so the high sum are short now I come to a related issue and this has been said again and again that LIC's costs are very high particularly because of its extensive agent network and we know LIC's agents are something like 12-13 lakhs so what will be the consequences for the agents and what is the understanding that in common perception is perhaps that the agents are like brokers but that is not true in the life insurance business so what will be the consequences for agents and therefore for prospective policy holders no LIC's main strength is its agency force even today with lot of other channels that have opened up to procure business agents contribute more than 82% of the business and LIC agent is not just an agent if you go to a rural area LIC agent is also a financial advisor and he's looked upon as a messiah in the rural India who would come to the help of people in need so this strong force and even our adversaries they said that it is a gold standard and the goodwill that the agent generate the brand that the agent generate cannot be quantified it is a huge asset to LIC so to say that because of the agency force the cost of LIC is increasing in fact as you say this it is perhaps the reason why there are virtually no complaints of misselling by the life insurance corporation in India as compared to the many many many cases that you hear I mean I have heard a whole lot of cases from Rajasthan for instance about the gross misselling of policies by private insurance companies that is basically because most of the private companies are promoted with the banks and the bank insurance is their strong channel and 65% of the business for the private sector comes through the bank insurance Bank insurance means they are selling the insurance policies and banks have been given a quota and to fulfill the quota a lot of malpractices take place and certain cases have come to light where poor people who go to create a fixed deposit their money is diverted to the insurance policy so all this does not happen with LIC because the agent is a link between LIC and the policy and secondly our selling of insurance through bank insurance is very limited and also I think LIC has a system in place which ensures that agents what the agents sell is what the insurance company wants so scope for misselling is much less yes scope for misselling is less but compared to the private sector even if you look at the IRDA reports you would find that the complaints against LIC is much slower compared to the industry in the other private and the complaint resolution also is nearly 100% in LIC so that is because the agent explains it and there is a close relationship between the policy owner and the agent and that is the reason why the misselling is much less non-existent compared to the private sector but you are talking about the cost and this is absolutely a false propaganda because even if you read the IRDA report the operating cost of LIC is much lower than the private sector whereas the operating cost of LIC is around 8.5% of the premium income for the private sector it is around 12% so and if you look at the quantum of the policies 29 crore individual policies and another 10 crore group policies a single employee servicing the number of policies when you compare it to the private sector it is many many times smaller so the total strength of LIC now is about 1.5 lakh employees serving around 40 crore policies whereas in the private sector the total employment is around 2.5 lakhs and they hardly service about 6 or 7 crore policies so the productivity is much higher and in terms of the claim settlement performance which is the barometer for judging the efficiency of the institution like insurance company we come up with flying colors so all talk about this expense ratio is high is not true so picking up from this if the LIC is reoriented in a certain way what do you foresee as the consequences for life insurance in India see there is a criticism that insurance penetration in India is low so life insurance penetration is over 3% no it has reached the world average but insurance penetration is seen as a percent the premium that we earn as a percentage of the GDP but many actually they have come to the conclusion that it is the wrong way of judging it because everything depends upon the disposable income in the hands of the people and there is no disposable income so insurance penetration is bound to be low I mean according to the Azim Premji's report 90% of the households earn less than 10,000 rupees what is the disposable income so how are they going to invest despite this if you look at the total population in India and compare that to the lives that are covered by LIC it is something which is phenomenal because every Indian is not insurable there are children so the insurance council itself estimates that there are about 60 to 65 crore insurable population in India if out of this 60 to 65 crores if you are insured about 35 or 40 crores which means that around 60% you are already insured and that is not insignificant in a country where the disposable incomes are so low so that is primarily because of the work that LIC has done to spread the message of insurance across the country now in the run up to this IPO there were two important clearances from regulatory bodies that the government had to get the IPO through one was the IRDAI itself and the second was the securities and exchange board of India for the capital markets clearance now what has been the conduct of the IRDAI because the IRDAI is primarily responsible for protecting the policy holders in clests and what has been the conduct of the IRDAI in allowing this to happen in this manner I ask this because IRDAI's conduct in the past have been particularly harmful to the LIC I am talking about the solvency reserve issue a few years back or even the time I think it was in 2014 when LIC was forced to withdraw all the policies and reissue them again and it created quite a bit of chaos and so what I want to ask is has IRDAI been negligent or is it willful? No, the simple fact is that the government does not attach any importance to the regulators there is no head for IRDAI for the last two years secondly with the LIC Act being amended the role of IRDAI in respect of LIC has been reduced after that after this amendments have been brought about LIC has brought a life insurance LIC regulations 2021 those regulations have been notified by the government and those regulations speak about the capital structure and all and they say that IRDAI has got the power only to give it's observations on the proposals which LIC sends more than that it has no power within the preamble of the IRDAI itself it says that it is one of its duties primary functions is to protect the interest of policy holders now as we have discussed there is significant harm being caused to policy holders and IRDAI has not acted that is one and secondly this whole way of valuing the embedded value as principle as it has evolved through the IRDAI, sanctified by the IRDAI is particularly not applicable to the unique institution that LIC is yeah they see, so I will complete where I was speaking see IRDAI role is limited to giving it's observations and the LIC while filing the returns with the SEBI also have to incorporate the observations of the IRDAI so IRDAI you don't have to take permission from IRDAI to go for the IPO the second issue as far as the policy holders interest are concerned IRDAI for a long time has been campaigning that LIC has to fall in line with the general regulations of the IRDAI and the general regulations of the IRDAI is that the surplus is distributed 90% to the policy holders and 10% to the shareholders with the shareholder getting 100% of the profits from the non-participating so IRDAI does not find any fault with this because it falls in line with the general policies yes but I mean it is talking about the largest incumbent insurance company and it is destabilizing it for the sake of making it fall in line with the rest of the industry which is a much smaller component and far more recent so that's why it is particularly harmful to the LIC the simple thing is that everything is today related to the politics that is being played out in the country and I don't think that no regulator is independent in India today and every regulator is being told what is to be done so whether it is a Reserve Bank of India or IRDA or SEBI you look at this government gives a suggestion or a directive to the SEBI that LIC prospectus which runs to about 652 pages within three weeks you have to approve it whereas even for the normal IPOs for your lesser amount SEBI normally takes about 75 days but here the SEBI has been forced to give its approval fast so forget about the independence of the regulator no regulator is independent yeah in fact the other thing that I raised was the IRDAI's this whole concept of what it has sanctified as the valuation process it completely misses the point that LIC is a completely different kind of animal altogether and it applies the same principles to this and therefore we have this problem with the valuation no valuation see the question is that the actual form they said that they have followed all the guidelines laid down by the actual society of India so IRDAI does not lay down how the company has to be valued it has to be done by the actual society and then this advised the actual form they said that we have followed all the guidelines given by the actual society of India the question here is that for a long time IRDAI has been asking LIC to fall in line with its general regulation LIC had been resting on the ground that IRDAI act is a general act LIC act is a special act and in a legal jurisprudence a special act overrides the general act so that is why LIC for a very long time resisted the issue of solvency margin and it says that we have a government guarantee on the policy what is the necessity of a solvency margin but IRDAI ultimately prevailed upon the government to direct LIC to do it and even then LIC said that we will provide for solvency from a future date the policy sold after the IRDAI came into existence but IRDAI opposed LIC to make provision even for policies which were sold earlier to the IRDAI itself coming into existence so IRDAI has not been kind to LIC that way though the fact is that some of the former Germans of LIC were also the chairman of the IRDAI that did not help the institution and though the government now the basic after this one important issue that the private sector is going to take it out is that why the government should continue to give the guarantee for LIC policies though the government has not touched that aspect and the finance minister has assured that policy of LIC are going to get the government guarantee we are not sure how long it is going to remain the withdrawal of the guarantee will create chaos it will create chaos, it will definitely and then the other issues also that is why we are saying that you should not have gone for IPO so when there are private shareholders how a state can give guarantee for their businesses too so sooner or later there will be pressure there is going to be pressure there is going to be pressure you would want those guarantees to be withdrawn but as of now the government has guaranteed that for all times to come we will hold 51% stake in LIC and the sovereign guarantee on LIC policies will remain but we want to assure the policy holders of LIC that sovereign guarantee was never issued with LIC because LIC never asked for any additional capital or any bailout unlike many other institutions the guarantee has never been invoked the guarantee has never been invoked so the policy holder need not worry about this their interest will be protected by their remaining vigilance and the employees trade unions who have been protecting their interest and campaigning for their interest will continue to do so and ensure that their interests are protected so what are the plans of your union to raise this issue among policy holders and among the general public and what are the ways in which you see you can broaden this struggle against see we have been campaigning among the policy holders and the general public we are educating them about the dangers of this finest institution being privatized in the long run and we are seeking their support for our struggle at many places we organize policy holders conventions and all this the government in order to overcome that campaign the government introduced that reservation for the policy holder that is unlike any other company where no stakeholder was given the reservation here the policy holders but 10% shares to the policy holder is not going to say if all the policy holders of LIC apply assume that they all apply they will not get even one share so that is just the eye wash the richer sections among the policy holders are going to coordinate this and the poorer sections who pay a very low premium and who are not there in the share market will not come and even if you look at this share holding pattern of this public sector banks less than 5% of the retail investors so the remaining is with the big shareholders are institutional investors and that is bound to happen even here so the government says we are giving an opportunity for the shareholders to profit from the value LIC has created it will benefit only a small section of the share holder overall the entire policy now is to privilege the share holder over the policy holder rather than from the earlier policy of privileging the policy holders over the share holder so we are going to continue our struggle because we do not see that 5% at the end of the day so our struggle is going to be prolonged and we are confident that we are going to stop government at some time because their political situation will not remain static it is bound to change and there will be much better opportunity for the investors so what are the ways in which you are trying to broaden the struggle even before or after the IPO? no basic thing is public mobilization the second is industrial actions within so we as our organization has decided to register or protest on the opening of the subscription of LIC IPO by a one day strike and after that we are going to continue because as an organization we have come to the conclusion that this is very important if you don't react, if you don't protest even knowing fully well that the government will not roll back this IPO we want the history to judge us kindly history should not judge us that these people developed a cold feet so we want to lodge our protest and we are going to go on a one day strike what has been the response of political parties in this? the individual members of the parliament they say that this is unnecessary including from the BJP we have met a large number of BJP members of the parliament they say individually and some of them have also written to the finance minister and the prime minister saying that employees union they came and explained and we go by their opinion the government can have a relook but they say that ultimately when it comes to the parliament it is a issue of BIP we have to go with the government but the opposition parties a large number of them almost every one of them they have been approached and they have said that what the government is doing is not right and the government should have a relook so those processes will continue and we will continue our struggle there is no question of it will be a long drawn struggle we will continue that struggle thank you very much thank you