Will LIC IPO move the needle on insurer's stewardship role in equities?

The PSU holds equity stake worth over Rs 9.5 trillion in listed firms; how it votes on resolutions will now be more actively tracked

Will the initial public offering (IPO) and a subsequent listing on the bourses provide an impetus to the stewardship role played by Life Insurance Corporation of India (LIC), the country’s largest domestic institutional investor in equities?

A stewardship code requires institutional investors to be transparent about their investment processes, engage with investee companies and vote at shareholders' meetings. Such a code for insurance companies was issued by the Insurance Regulatory and Development Authority of India (Irdai) in 2017.

LIC’s code, approved by its board on March 2020, says that it will discharge its stewardship responsibilities through voting on shareholder resolutions, advocating responsible corporate governance practices and intervening amid material, environmental, social and governance risks that it sees in investee companies.

LIC has voted in 2,393 resolutions since May 2020, data collated from IiAS, a proxy advisory firm, shows. Of these, 2,239 votes were in favour of the resolutions and 33 against them, with 121 abstentions. In the same period, SBI Mutual Fund, the country’s largest mutual fund, has voted on 3,947 resolutions, 65 per cent higher than that by LIC.

“LIC does vote on resolutions selectively but how objectively it does so remains a question mark,” said Shriram Subramanian, founder and managing director of InGovern Research Services, another proxy advisory firm. “They are pulled and pushed in different directions by the finance ministry and the companies themselves, especially on contentious issues. It won’t be easy to shake this off even post listing.”

An email sent to LIC did not immediately elicit a response. 

LIC's DRHP acknowledges significant government influence as one of the risk factors.

“Our Corporation may be required to take certain actions in furtherance of the GoI’s economic or policy objectives. There can be no assurance that such actions would necessarily be beneficial to our Corporation. The interests of the Promoter could be in conflict with the interests of our other shareholders. We cannot assure you that the promoter will act to resolve any conflicts of interest in favour of our Corporation or the other shareholders. To the extent that the interests of the Promoter differ from your interests, you may be disadvantaged by any action that the Promoter may seek to pursue,” LIC’s draft prospectus says.

The value of LIC’s share of holding in companies listed on the NSE touched an all-time high of Rs 9.53 trillion in the third quarter of FY22, accounting for nearly 30 per cent of domestic institutional assets in equities.

As of September 30, 2021, LIC was classified as a promoter in 14 companies, it had more than 20 per cent stake in 13 companies and had a Board position through agreement or nominee directors in 59 companies where its holding was below 20 per cent, according to the draft prospectus. It still invests a significant amount in state-owned enterprises, although that share has been falling consistently: from over 30 per cent to about 20 per cent in the last seven years, according to UBS.

Stewardship has two elements to it when it comes to LIC, says Amit Tandon, founder and managing director at IiAS. One of these has to do with managing the investments: investing and monitoring the portfolio, including how you vote on where you own equity. The other element is the aspect about looking after the business for future generations, he says.

“LIC has been reasonably active with regard to the former and has been monitoring its investments and voting on resolutions for a while now," said Tandon. "Stewardship of the business is an area where all PSUs do some things right and some things not so right. But given the fact that some of the PSUs, including LIC, have grown to become behemoths, they have balanced the competing objectives, business and social, reasonably well."

In 2020, the state-run insurer upset Vedanta’s plans for delisting by submitting all its shares at Rs 320 a piece -- 267 per cent premium to the floor price of Rs 87.25. Since LIC held a 6.37 per cent stake, its bid price become the discovered price, making the delisting unaffordable for Vedanta. LIC's stance seems to have been vindicated. The stock is currently trading at Rs 369 apiece and the promoters  concluded a stake purchase in December worth Rs 1509 crore at Rs 340 per share. 

“There is a perception that LIC has been voting on the basis of what the Government of India has been telling them to do. But, we haven’t found that to be the case, at least in a few instances,” said Tandon.  

Instances of shareholder activism are rare in India. But, the adoption of the Companies Act, 2013, the introduction of e-voting, rise in institutional ownership of Indian equities, emergence of proxy advisory firms and the regulatory nudge to formulate a stewardship code are goading investors to engage with boards of listed companies more closely, said experts.

“While there is greater awareness among institutional investors about their stewardship responsibilities, will the IPO nudge LIC to do things at a slightly different pace? There is no basis for me to say that at the moment,” said Tandon.

The listing, however, may make the insurer more answerable to its shareholders on its voting decisions. “Hopefully, over a period of time, LIC will lay down certain ground rules, take the help of third-party research and become more objective in how it casts its votes,” said Subramanian.