Scandal: LIC shares at a deep discount because Govt under pressure, alleges Commission

Peoples’ Commission on the Public Sector & Public Services this week described LIC’s IPO as a public scandal. In a last-minute appeal the Commission urged the Union Government to desist from the IPO. Signatories include people like former Economic Affairs Secretary E.A.S. Sarma, Professor Emeritus at JNU Dr Prabhat Patnaik, former Planning Commission Member S.P. Shukla and former finance minister of Kerala Thomas Isaac.

Pointing out that the Government had other options to raise revenue, including taxing the rich and High Net Worth (HNI) individuals, the Commission regretted the Government’s decision to dilute its stakes in LIC, which has stood the test of time and remained as a commercially vibrant organisation.

The Draft Red Herring Prospectus (RHP) submitted to SEBI in February had put the Embedded Value (EV) of LIC at Rs 5.40 lakh Crore. This was the minimum value estimated and according to which each LIC share was worth Rs 853. But the true value of the share should have been derived by a multiplication factor ranging between 2.5 and 4 reflecting market capitalisation, the Commission argued, as in the case of much smaller peers like HDFC Life, ICICI Prudential and SBI Life.

LIC’s shares should have been worth Rs 3,379 each at the multiplication factor @3.96 as in the case of HDFC Life. However, the price band at which the LIC shares are being offered is between Rs 904 and Rs 949 each. This figure suggests a multiplication factor of just 1.1.

A multiplication factor of 3.96 (HDFC Life) and the correct valuation of LIC’s shares, the Commission points out, would have fetched the Government Rs 74,803 Crore instead of Rs 21,000.

The window for LIC’s IPO would have closed on May 12, necessitating a fresh RHP later. But the Government decided on April 26 to approve LIC Board’s decision on April 23 to go ahead. With most experts agreeing that market conditions are not ideal for the IPO and that the IPO should have been deferred, why is the Government in such a hurry to lose money, asks the Commission.

If the Government loses Rs 50,000 Crore, who will gain from trading in the undervalued LIC shares is the question.

This is the reason the Commission feels the LIC IPO is the biggest privatisation scandal in the country.