Govt planning to change rules of surplus ratio ahead of LIC’s IPO: Report

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The central government is considering modifying the rules of surplus distribution of Life Insurance Corporation of India, ahead of its Initial Public Offering (IPO). The step is being taken to align the surplus distribution of the country’s largest public insurer with its private counterparts. Presently the public insurer is only allowed to transfer 5% of its surplus to the shareholders, with the remaining going to the funds of its policyholders, as per the existing norms.

However, the private insurers distribute their surplus in the ratio of 90% towards the policyholder’s funds and 10% towards the shareholders. According to a Times of India report, the government is planning to make changes to this ratio before launching the IPO to make it more attractive. The TOI quoted a government source as saying, “It’s only natural that investors will expect a similar structure. We are working out the details, along with a few other changes.”

Impact on policyholders

As reported by the Times of India, the possible changes in the pay-out ratio won’t make a big difference to stakeholders, given that the gains from selling protection also make up an important part of the profits of the private companies. The report added that the policyholders can expect to enjoy any surplus on the lines that a private insurer gains from selling protection.

“The government and the policyholders share the profit of LIC. Changing the distribution policy will profit shareholders. But it may affect existing participating shareholders. The government is of the opinion that many who have purchased life covers from LIC will also buy shares in the IPO as a proportion of the issue would be reserved for them. This will help them benefit from the dividend in the coming years,” the TOI report added.

How surplus will be calculated

Also, given that the public insurer is expected to be run by a special dispensation, despite the government allowing 74% foreign direct investment (FDI) in the insurance business. The government is expected to clarify the proportion of FDI it will allow in LIC after its public listing.

The valuation surplus of LIC will be calculated after accounting for the business that’s already underwritten, which means that policyholders with term insurance, guaranteed return policies and unit-linked plans will not be affected by dividend distribution rules.