Govt set to allow 20% foreign direct investment in LIC ahead of listing

The Centre has decided to allow 20 per cent foreign direct investment in the Life Insurance Corporation of India (LIC), like in the case of public sector banks (PSBs), according to people in the know. This is expected through amendment of the Foreign Exchange Management Act (FEMA) rules in a move to attract foreign investors ahead of LIC's public listing.

The Department of Financial Services (DFS) and the Department of Investment and Public Asset Management (DIPAM) have finalised the plan to amend the Foreign Direct Investment (FDI) policy in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), said an official.

“The changes will include allowing FDI in ‘body corporates’ as the current FDI policy allows foreign investments only in companies, and not in corporations,” said the official. A suitable definition will be included in the policy to allow investments in the insurer, he added.

A body corporate is any entity that has its separate legal existence apart from the persons forming it. While FEMA rules allow foreign investments in companies, these do not recognise body corporates. The rules are now proposed to be amended, the official said.

The tweak will open doors for foreign investors who are keen to participate in the initial public offering (IPO) of LIC, considered to be India’s largest public offering. The government is expecting the valuation of the insurance behemoth to be around Rs 10 trillion, and is targeting to launch the IPO in March.

The DFS and DIPAM have submitted their inputs to the DPIIT, and the industry department is incorporating these changes into the FDI policy, another official said. These changes will then be taken to the Cabinet for approval.

Allowing 20 per cent FDI in LIC would bring the foreign investment in the insurer at par with public sector banks, which have the same investment limit but require government approval.

Getting IPO-ready

• DFS, Dipam and DPIIT have finalised the change in FDI policy
• Changes also proposed in Foreign Exchange Management (Non-Debt Instruments) Rules
• ‘Body corporate’ may be included in eligible investee entities  
• 20% FDI cap would bring LIC on a par with public sector banks
• LIC Act prescribes 5% cap for non-government shareholders

According to the current FDI policy, foreign investment of 74 per cent is permitted under the automatic route in the insurance sector. However, this does not apply to LIC, which comes under its own statute. In the Budget, the government had approved amendments to the LIC Act, which prescribes a 5 per cent cap for non-government shareholders, unless otherwise notified by the Centre.

Last week, DPIIT Secretary Anurag Jain had said the government was working towards a review and simplification of FDI policy to facilitate seamless foreign investment in the proposed IPO. The existing FDI policy may not be conducive for investors participating in the IPO, Jain had said.

“The government is not expecting this 20 per cent cap to be fully utilised by foreign investors participating in the public offering. Investments over 5 per cent require permission from the government, and we are not hoping FPI investments would be that high,” the official quoted above said.

Since LIC was formed under the LIC Act as a corporation and not as a company, the issue with the government would be to amend the FDI policy to allow foreign investments, said Dipti Lavya Swain, corporate M&A expert and partner, HSA Advocates.

“The current policy allows 74 per cent foreign investment in an insurance company. It is likely that the government will provide a specific clarification through an amendment to the FDI policy, allowing FDI in LIC. Along with this, amendments to other laws such as the LIC Act are also key to streamlining the entire process,” Swain said.