Govt considering gradual changes to surplus distribution policy of LIC ahead of IPO: Report
New Delhi: The Centre is reportedly planning a gradual change in the rules for distribution of surplus of Life Insurance Corporation of India (LIC)— India’s largest state-run insurer—between policyholders and shareholders, and it is being done as part of the initial public offering (IPO) process of LIC, touted to be India’s largest.
Currently, LIC gives 95 per cent of its surplus to policyholders and 5 per cent to shareholders. The Finance Ministry will change its rulebook for distribution of surplus in such a manner that policyholders do not feel the immediate impact of the drop in distribution share. The gradual tweak is aimed at adopting the regulator-instructed distribution of surplus, according to a report in Business Standard.
As per the rules of the Insurance Regulatory and Development Authority of India (Irdai), life insurance firms have to distribute the surplus in the ratio of 90:10 among the policyholders and shareholders. According to Section 28 of the LIC Act, 90 per cent of the surplus or more as decided by the Centre is reserved for policyholders.
At present, LIC provides a surplus in the 95:5 ratio. However, the LIC Act provides the insurer flexibility to cut it to 90:10 in the future.
The financial daily cited an official as saying that equilibrium will be maintained between the interests of LIC’s policyholders and new shareholders, and the exercise will be done keeping in mind the interests of existing policyholders and new shareholders who come on board with the listing of state-owned insurance behemoth.
“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 told the publication.
Negotiations 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), as well as intermediaries to help the listing of LIC. The insurance regulator has also been consulted on the modalities to change the insurer’s surplus distribution.
Talks are also on with the regulator to separate the operations of participating and non-participating funds, which has been proposed via amendments to the LIC Act made through the Finance Act. Profits of the participating fund of the insurance company are shared with the participating policyholders, while the profits and dividends of the non-participating policies are not shared with the policyholders.
The changes in the surplus distribution of LIC are still in the early stages of discussion and no final decision has been taken in this regard. Further, the Centre has informed investors about the growth and prospects of LIC, and it has decided to abolish the post of chairman and appoint a chief executive officer.