Gradual tweaks to LIC surplus payouts likely; Finmin exploring a glide path

Finmin exploring a glide path; considering the interests of both policyholders and future shareholders

The government is considering gradual tweaks to surplus distribution of Life Insurance Corporation of India (LIC) to policyholders and shareholders as the insurer looks to list on the stock exchanges.

The finance ministry is exploring the adoption of a glide path for changing the existing surplus distribution from 95:5, so that policyholders do not immediately feel the pinch. The gradual change will aim to move towards the regulator-mandated distribution of surplus.

The Insurance Regulatory and Development Authority (Irdai) currently mandates distribution of surplus by insurers in the 90:10 ratio, where 90 per cent goes to policyholders and the remaining to shareholders.

Section 28 of the LIC Act provides 90 per cent or more surplus -- as approved by the central government -- from the life insurance business to be reserved for policyholders. Presently, LIC distributes its surplus in the 95:5 ratio, allocating 95 per cent to its policyholders and the rest to the government. The LIC Act provides the insurer flexibility to reduce it to 90:10 in future.

A fine balance will be struck for both policyholders and new shareholders of LIC, an official said. The exercise will be carried out considering the interests of existing policyholders, and the new shareholders who come on board with the listing of the insurer.

“The government is also conscious of the fact that it will have to unlock the wealth for LIC shareholders. But, at the same time, we will also have to safeguard the interests of policyholders,” he said.

Deliberations regarding the change in LIC’s surplus distribution are underway between the finance ministry’s Department of Investment and Public Asset Management (DIPAM) and the Department of Financial Services (DFS), along with intermediaries appointed to assist the listing of the insurer. Consultations with Irdai have also taken place on how to tweak the distribution.

On the cards

• Currently, LIC distributes 95% of its surplus to policyholders
• Surplus distribution will have to be tweaked ahead of LIC’s IPO
• Irdai mandates 90% surplus to be distributed to policyholders and remaining to shareholders
• Deliberations being held between finance ministry, Irdai and intermediaries assisting the IPO
• Govt’s view is gradual change in profit distribution to protect interests of both policyholders and new shareholders

Discussions with the regulator have also included operationalising the segregation of participating and non-participating funds which has also been proposed through amendments to the LIC Act made through the Finance Act. Participating policyholders share profits of the participating fund of the insurer, while non-participating policies' profits and dividends are not shared with policyholders.

As the government plans the country’s largest public offering, it is laying the groundwork for it. The government has also reached out to investors to apprise them of LIC’s growth and prospects. It has decided to create the position of chief executive officer by phasing out the post of chairman, and has notified changes to make the functioning of the insurer board-driven.

A part of the public offering will be reserved for employees and policyholders of LIC. The insurer has also started creating a database of policyholders who would be eligible for the reserved 10 per cent of the allotment in its initial public offering (IPO), targeted for a launch in the last quarter of this financial year.

DIPAM has also floated tenders for the appointment of legal advisers, share transfer agents and advertising agency ahead of the initial public offering. It will also appoint up to 10 merchant bankers as book running lead managers for the IPO.