The government has been promoting the Life Insurance Corporation of India’s (LIC’s) initial public offerings (IPO) and even amended several rules and regulations so that even foreign investors can participate in the LIC IPO. But the draft red hearing prospectus (DRHP) submitted by LIC to the Securities and Exchange Board of India (Sebi) on February 13, says that complex regulatory system of the Indian government along with various investment restrictions have become roadblocks for its business.
Slower Business Post-Covid
LIC has mentioned in its Annual Report 2021 and also in its DRHP that, like several other businesses, it was affected by the outbreak of Covid and multiple lockdowns. Although, more people were opting for insurance covers after the pandemic, several factors like inflation, fiscal deficit and other monetary conditions posed a threat to the LIC business model.
“In the life insurance space, around 66 per cent of the market share in terms of premium is held by LIC, which is wholly owned by the government; and (LIC) has an extensive distribution network and a strong brand image,” says the company’s latest annual report. So, any headwinds that the Indian economy faces, will directly affect LIC and pose a risk.
The company has stated in its annual report that the total number of maturity claims settled in 2020-21 has fallen by more than 3 per cent. While it could settle 222.76 lakh maturity claims in 2021, it had settled 206.66 lakh in 2019-20 and 250 lakh in 2018-19. Here are are some of the major regulations and restrictions of the government that created roadblocks for the business.
Complex Regulations
The business faces risk of penalties imposed due to a complex regulatory system. “Our Corporation is subject to complex regulatory requirements and if we fail to comply with these regulatory requirements, our operations could be disrupted or we may become subject to significant penalties. In addition, any changes in regulatory requirements could have a material adverse effect on our business, financial condition, results of operations and cash flows,” states the company’s DRHP. Some of the regulatory aspects that could affect the insurance business include investment regulations, issuance of capital, caps on commission and advertising regulations.
Mandatory Investments
Another risk that investors should be aware of is LIC’s investment in government securities. “(The) Corporation is required to invest a minimum of 50 per cent of our life fund (funds other than those relating to our pension, general annuity and group businesses and unit reserves of all categories of our unit-linked business) in government securities, which could have a negative impact on our income since interest earned on this portion are at rates that are generally less favourable,” says DRHP.
Shareholding Pattern
Though the government has amended the foreign investment policy to maximise participation from abroad in the LIC IPO, this remains a point of concern for the company. As mentioned in the DRHP, foreign investment in insurance companies is currently limited to 74 per cent via the automatic route, and there are restrictions on transfer of LIC’s equity shares. Moreover, under the Life Insurance Corporation Act, the shareholding of the government in LIC cannot fall below 51 per cent, meaning that cumulatively, all investors will be able to hold not more than 49 per cent of the shares at any time. Additionally, no entity other than the government can hold equity shares in excess of 5 per cent of the issued equity share capital, or a higher percentage if the government notifies. Failure to adhere to these levels of shareholding could lead to penalties, which is again a risk factor.
Solvency, Advertising Rules
The Insurance Regulatory and Development Authority Of India (Irdai) requires insurance companies to have a minimum solvency ratio (a measure of the insurer's ability to settle claims) of 1.50. Failure to maintain this minimum level poses a risk. “Revisions to the IRDAI Advertisement Regulations could further restrict our ability to effectively conduct our advertising and marketing campaigns, which could impair our ability to improve brand recognition and build brand loyalty,” the insurer has mentioned in its DRHP.
