The government is likely to stand guarantee to Life Insurance Corporation for risk management losses instead of amending LIC Act to allow it to tap the market or infuse fresh capital.
The government guarantee is being preferred as it would neither require amendments in LIC Act nor will it require the finance ministry to make additional budgetary provision.
Although LIC can easily raise over Rs 6,000 crore (Rs 60 billion) by offloading just five per cent government stake and meet Insurance Regulatory Development Authority's solvency norms, the finance ministry has ruled out such an option as it required the "political decision" to amend LIC Act.
The Financial Sector secretary N S Sisodia said, "There is no consideration for amending the LIC Act. We need to corporatise LIC to enable LIC tap the market. But the Common Minimum Programme provides that there can be no structural change in LIC and it will remain a PSU."
While ruling out LIC's IPO, Sisodia said, "The ministry can work out an alternate plan." He did not divulge details but LIC executive director S C Bhargava told PTI that government can give a guarantee to the corporation for meeting the risk management losses if itarise in future.
This would assist LIC to get an exemption from regulator IRDA for complying with solvency norms. Otherwise, LIC needs to provide Rs 2,000-3,000 crore (Rs 20-30 billion) for meeting solvency norms.
So far, LIC has never required government guarantee or capital infusion unlike other financial institutions like Industrial Finance Corporation of India, Industrial Development Bank of India and Unit Trust of India. LIC has hidden reserves worth Rs 34,000 crore, (Rs 340 billion) Bhargava said, adding "it won't be a problem for us to raise capital."
LIC was meeting the capital requirements from its surpluses. However, this was not the best way to meet the solvency margin. LIC has already provided for Rs 14,000 crore (Rs 140 billion) for meeting the solvency norms till March, 2004.
Going by the business growth of about 65 per cent till now, LIC needs Rs 2,000-3,000 crore (Rs 20-30 billion)additional capital annually to meet IRDA norms.
The insurer had approached the government for hiking its capital either through initial public offer or otherwise, to sustain its growth momentum. LIC, which has a capital of only Rs 5 crore (Rs 50 million), needs to hike its capital and for that LIC Act has to be amended, chairman S B Mathur said on Monday.
Since finance ministry has ruled out such an option, the other two alternatives were infusion of capital by the government or a guarantee for risk management losses.