LIC IPO: Gross Underestimated Valuation; Put It on Hold, Says EAS Sarma
Moneylife Digital Team 17 January 2022
Raising serious questions on the valuation of Life Insurance Corporation of India (LIC) for its initial public offering (IPO), EAS Sarma, former secretary to the Indian government, has asked the ministry of finance (MoF) to put on hold the entire process of disinvestment of LIC and other Central public sector enterprises (CPSEs).
Mr Sarma, in a letter to finance minister Nirmala Sitharaman, says, “I do not think that your ministry can rush through with the LIC IPO based on a perfunctory valuation exercise, merely to derive limited, illusory fiscal resources. I refer to the disinvestment proceeds as ‘illusory’ because they come from the same pool of domestic savings from which the government also borrows.
“If you get one rupee of disinvestment proceeds, you will be losing that one rupee which you could readily borrow from the savings pool on much more cost-effective terms, as government borrowings are backed by an implicit sovereign guarantee. The only difference that arises when the LIC is handed over to a few investors is that the government would then have dismantled an excellent institution like the LIC in the name of getting such illusory proceeds! I request your ministry and all others in the government who are concerned about this to ponder over the questions I have raised,” he says.
The former secretary to the Union government further says, as he understands the MoF has appointed a private consultant to undertake the valuation of the LIC and according to the latest reports, “the estimated value of the public issue is Rs15 lakh crore, and the so-called ‘embedded value’ (the statistical measure of investors’ interest in an insurance company) of the corporation is Rs4 lakh crore.” 
Mr Sarma adds, “The methodology of valuation, the assumptions that have gone into it and the factual information considered by the valuer have not been divulged in the public domain. It is unfortunate that the policyholders of the LIC and the public at large should get information on this, only through rumours and gossip. If your ministry proposes to keep the public in the dark about such information, I am afraid that the entire LIC disinvestment process will stand vitiated, as it violates the letter and the spirit of Article 19 of the Constitution, which provides for transparency in governance.
“Prima facie, it appears to me that the value of the corporation at Rs15 lakh crore and its embedded value of Rs4 lakh crore is a gross underestimate, considering the vast, highly valuable land assets that the LIC possesses today across the length and the breadth of the country, the enormous public trust and the goodwill it enjoys as a public sector institution that truly belongs to the millions of its policyholders and its preeminent role in funding infrastructure, housing and the other social sector projects of crucial importance for the society at large,” the former bureaucrat says. 
Mr Sarma also feels that the divestment of Central Electronics Ltd (CEL) was ‘miserably mishandled’ by the ministry. In November last year, he sent a letter to the ministry but said he has not received any reply so far. 
In his latest letter, he says, “Please recall how your ministry had grossly undervalued such a highly competent, valuable CPSE as the CEL, at a rate several orders of magnitude less than its intrinsic value and how your ministry had almost sold the company away to a private company of questionable antecedents, till CEL’s employees, eminent scientists and a civil society group, the People’s Commission, raised their voices against it.
“It is equally unfortunate that your ministry should nonchalantly handle such an important matter as the disinvestment of a strategic CPSE so casually and that it should get exposed only when the civil society had expressed its shock and dismay! I get the feeling even at this stage that, by ordering an internal, departmental enquiry into the CEL matter, the Union government is only trying to obfuscate the contentious issues that revolve around it and delude the public,” he added.
Having burnt its hands thus in the case of the CEL, Mr Sarma says the MoF should be far more cautious in embarking on yet another questionable adventure of selling a treasured institution, this time, an insurance behemoth such as the LIC, of critical socio-economic importance, in a casual and indiscreet manner. 
The former bureaucrat and environmental activist also warns about serious public concerns of the LIC IPO. He says, “In case your ministry insists on rushing through with the sale of the LIC equity as a prelude to its further disinvestment, I am sure there will be serious public concerns about how your ministry has determined the embedded value of the LIC and why it is ignoring the policy holders’ stake in it, with the narrow intention of handing it over to a few profit-driven investors.”
Mr Sarma says, in the erstwhile planning commission, in which he had the privilege of working at one time, there used to be a project appraisal division (PAD) that had built a professional capability to carry out a social-cost-social-benefit appraisal of public investments, an exercise that now assumes relevance to valuing the LIC. 
Unfortunately, he says, the successor to the planning commission, the present-day Niti Aayog, has neither the time nor the inclination, nor the wherewithal, to consider the societal dimension of public investments and public institutions. “I wish that the erstwhile PAD’s services are available today to examine the value of the LIC critically,” he points out.
According to the former secretary, there is an important conceptual issue regarding the valuation of the LIC, and from whose perspective it should be valued.  
He says, “Should it be from the point of view of the society at large (‘social value’ based on social cost or social benefit analysis and the income distribution implications)? Should it be from the point of view of a handful of domestic and foreign investors, who wish to maximise their short-term profits, without caring to value the enormous societal value of the corporation?
“Should it be from the point of view of the government (both the Union and the states) who have used the LIC as an instrumentality of the state to realise several social objectives, rightly so? Should it be from the narrow point of view of the finance ministry that often uses the LIC to leverage the capital market, to bail out other CPSEs in times of stock market volatility and even to discipline the markets at the cost of the policyholders?
“I am afraid that the LIC IPO will turn out to be as contentious as the sale of the CEL, the only difference being that the controversy that will arise in the case of the LIC would be far more serious and far more questionable, as the LIC’s role is a multi-dimensional one and its resources enormous,” he says. 
Mr Sarma sent a copy of the letter to the comptroller & auditor general of India (CAG). He says CAG should look at the proposed LIC disinvestment and all other cases of CPSE disinvestment and report to the Parliament.
“The so-called ‘equity’ created by your ministry to hand over the public sector insurance giant to a few profit-seeking investors does not strictly stand to reason. In my view, it is nothing but a fictitious idea. It does not reflect the policy holders’ contribution to the LIC. Request you to be highly circumspect in this matter and take a conscious decision to put the LIC IPO on hold,” the former bureaucrat says.
2 years ago
2 years ago
EAS Sarma writes brilliantly in classic circular logic to bolster his socialist ideology opposing India's attempt to become an efficient and wealthy nation.
He would rather have government gouge private individual investors, India's public citizens and stakeholders to maximize government wealth at the expense of its citizens by selling LIC shares at inflated prices that would later cause losses to the Indian public.
Let the government sell its shares at whatever price valuation experts recommend and leave some money on the table for risk taking investors.
If India were to entirely privatize its corrupt and inefficient public sector, steeply reduce interest rates and drop the 377% overall tax on petroleum products, it may finally have a chance at accelerating it's GDP growth to 15% a year to catch up with China.
Socialists have destroyed the economy since independence - the record is clear.
Why does a business website like Money Life give airtime to anti-national elements?
Replied to beachgoer01 comment 2 years ago
I have not fully understood the logic which Mr EAS Sarma has mentioned in his letter;but, why to call it anti-national ? Any view opposing the Government decision can not be anti-national !

Kamal Garg
Replied to beachgoer01 comment 2 years ago
Absolute correct and befitting reply.
Sharma PV
2 years ago
Not getting into the motives or biases of the author as alleged by the fellow readers, I just want to highlight the facts about CEL sale proposal.

This government had approved the sale of CEL to Nandal Finance and Leasing company in November 2021, for INR 210 cores. As of October 31, 2021, CEL had pending orders worth Rs 1,592 crore. With these orders alone, CEL would make a gross profit of about Rs 730 crore. As of March 31, 2021, land in possession of CEL was worth Rs 440 crore.

If you were the owner of such an enterprise, would you like to sell it for a fraction of value? Why not open it up for competition and get a better deal?(for a moment, let's think only money and no social responsibility).
Sharma PV
Replied to Sharma PV comment 2 years ago
If you owned LIC what is the price you would like to quote?
2 years ago
Mr. "SRS".. it is extremely unfair on your part in criticizing the views of MR.EAS.Sarma.. being a fellow resident of coastal city of Visakhapatnam, I can very proudly vouch for the highly well read and erudite scholarly Civil Servant and environmentalist. But for his self less service, Visakhapatnam would have been in ruins due to mass destruction of natural resources , flora and fauna. Your comments are un-called for. Let us oppose disinvestment of LIC.
2 years ago
Far from giving the exact valuation, Mr Sarma has been beating around the bush. Does he wants to say that all the disinvestment done during his era, were well balanced and justified. The article does not have any input from you, does that means you are in agreement with him and hence simply put it ? As already put by some one, if Mr. Sarma thinks that issue price will be too low as compared to the actual wealth of LIC, he has enough of resources from different sources, he too can get good benefit. All the Best Mr Sarma.
2 years ago
Any investment or disinvestment is always a contentious issue. The ex Secretary seems to be a well meaning person. But he has given enough reasons for pvt corporatization in his own letter.

Social causes, schemes, bail outs, market discipline, etc etc should not be funded by an enterprise in the economic space directly.

The bureaucrat has missed the goals of the limited divestment. It is not mainly to raise revenue but to make a behemoth into a well oiled enterprise with a greater positive result for all stake holders.

Although as a policy holder I am more comfortable with the LIC being a sovereign backed institution, I do know that there is no free lunch and eventually everything is paid for somehow, one way or the other.
2 years ago
If Mr. Sarma thinks that LIC is going to be severely undervalued in its IPO, he should go and raise a large sum of capital to subscribe to its IPO, sell the shares when they reach whatever value he thinks is the correct valuation and reinvest the proceeds in the social and environmental causes that he is a passionate advocate for.

As a former Cabinet Secy, he will have an impressive rolodex. Further, as a leading voice for NGOs in the ESG space, he will also be able to raise a large amount of capital from investors interested in ESG issues. It certainly beats writing letters that are going to be ignored anyway.
Replied to SRS comment 2 years ago
what kind of an social animal you are? Mr Sarma is a very up right officer and not like Pig who feeds on waste. Be responsible in appreciating the good work. You have to understand the difference between a good person and a corrupt bastard.
Replied to SRS comment 2 years ago
What an inane response that is. The ex-secretary needs to be lauded for opening our eyes to this gross non-transparency in selling off such a huge a social asset and many other such assets. This government is up to sell all our national treasures at a pittance, and that needs to be protested tooth and nail.
Kamal Garg
Replied to SRS comment 2 years ago
Very nice and befitting reply.
2 years ago
Observations by Mr Sharma regarding under valuation of LIC need close and critically in-depth analysis to reach to a conclusion beyond doubt. Under valuation of few enterprises happened earlier also resulting in accruing much gains to a few coteries of investors after the public issue.
Public sectors in India are created /established by the Govt from the public exchequers. In other words, public in general are also the owners of LIC through the Govt.
Purpose of the Govt for disinvestment of LIC is recover it's investments to make good it's budget deficit to the maximum extent.

Therefore deriving the right intrinsic value of the enterprises , here LIC, and set issue price accordingly would go to the advantages of the Govt only.
Kamal Garg
2 years ago
I think this article smells of some serious thinking biasness in the mind of the former bureaucrat who wrote the letter to MoF and actually reflects very bad on the part of a reputed magazine like MoneyLife to publish such article/letter, etc.
No input or analysis has been done by MoneyLife team which reflects very poor on the part of the magazine.
What is social cost and social values, no body is able to understand and how to quantify them?
It is the market which decides the price and not any government/ministry/babu, etc.
Let this small tranche of disinvestment hit the market, let there be more transparent and comparable working figures be available in the public domain of this behemoth along with other private players and then let the market decide on the right price.
What is so much hue and cry on this matter.
Replied to Kamal Garg comment 2 years ago
The bias seems to be coming from you. If the government is so clean, it should not have any trouble in being more transparent. Everything is being shrouded in secrecy and moreover, with such a huge hurry. The ex-secretary's point of LIC having huge real estate across India and non-disclosure by government seem to be valid. Reeks of a big scam.
Kamal Garg
Replied to vishal.karambelkar comment 2 years ago
LIC having huge real estate across India is well documented and reflected in the DRHP which will soon be uploaded on SEBI and stock exchanges' website after the draft is approved by SEBI. There is no secrecy/non-disclosure by GoI.
Moreover, in a free market based economy, it the market which decides the price of any product/service/commodity. Look at the way PayTm IPO failed in the market (it is down by roughly 40-50% of the IPO price). So the promoter can decide "any price" which it deems proper and right, but, ultimately the market decides the price in the long run.
2 years ago
The views presented are of Sarma.
Why no analysis from your team?
Such type of hue & cry was made when HAL & other enterprises were freed from Sick babus.
Today see valuation & credibility of HAL.
LIC will create far much valuation when listed.
2 years ago
Well articulated with seriousness the issue deserves.Time to hold a mirror to all those self proclaimed experts of questionable merit.
2 years ago
What is intrinsic value and it is determined? What is societal value and how it is determined? How both are related in government deciding on disinvestment? What is the value the author of this article consider appropriate? Do valuations done by external valuers not worthy? Should every decision of government be dissected in public before government take decision? Has such procedures followed in the past during planning commission era?

Can above be explained?
Dhaval Mehta
2 years ago
Does being part of the bureaucracy in pre IT era gives you right to write against the wonderful opportunity to the general public in wealth creation by unlocking true valuation of the mammoth institution. We should shed this communism and socialism approach unless we are ready to fully replicate China\'s model in the path of development, which I am sure many won\'t be ready for the same.
2 years ago
Do not listen to dead wood such fellows would like IAS to see all the girls before marrying one ... by then it may be too late
2 years ago
Well said sir
But will they consider worth ideas?
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