LESSONS IN OUR HICCUPS OVER SELLING AN LIC STAKE

News: Russia’s invasion of Ukraine has caused market uncertainty. This has prompted the government to rethink the launch of the Initial Public Offering (IPO) of Life Insurance Corp (LIC).

Why is this IPO important for the government?

The regulator’s approval of the IPO is valid only till mid-May. Any delay will upset the Centre’s fiscal math. It can also:

1. Provide significant revenue for the Centre.
2. Lead to reduction of fiscal deficit.
3. Will take LIC to the market.
4. Further push disinvestment agenda.

What lessons do uncertainty over IPO hold out?

Need to take faster approach: First lesson stems from the fact that since the Ministry has 2 years to finalize the strategy,  the IPO need not have been timed just before the end of 2021-22. Reasons for such a slow approach are not clear. They could be due to:

• Attempt to time the market: As financial advisors often advice retail investors to ride the bull run i.e. when market is growing.
• Politics: In the past, politics has played a role in deciding the timing of public-sector disinvestment. Example – Offshore listing of VSNL was pulled back due to apprehension of the coalition government that low prices will lead to Parliamentary opposition.

However such frequent flip-flops send mixed signals about share offer intended price range and also confuses investors.

Need to reduce over-reliance on disinvestment: Second lesson is related to the government’s over-reliance on disinvestment to get its fiscal right.

• Earlier, disinvestment was used as an emergency measure to make up for revenue shortfalls.
• Now it has been institutionalized. However, it has neither led to improvement in fiscal gaps over the year, nor has led to improvement in public sector efficiency.
• There is continuous failure to meet the disinvestment targets year after year.

Hence, disinvestment can be effective as an utilitarian exercise, but it is vulnerable to failure if used as a means of grand transformation.

Source: This post is based on the article “Lessons in our hiccups over selling an LIC stake” published in Live Mint on 15^th March 2022.