Rules of the game

Exceptions for PSEs should be avoided

Life Insurance Corporation (LIC) of India on Wednesday informed stock exchanges the Securities and Exchange Board of India (Sebi) had given it a three-year extension to comply with the mandatory 10 per cent public-shareholding norm. It can now attain the mandatory 10 per cent public float by May 16, 2027. Firms with a market capitalisation above Rs 1 trillion are expected to attain 25 per cent public shareholding in five years. However, in the case of LIC, it has already been extended to 10 years. While the LIC stock reacted positively to the extension announcement, it should have been avoided. Such regulatory forbearance affects the credibility of institutions in the market

One of the big weaknesses of the Indian policy establishment in the post-reform period has been its inability to sustain even good initiatives. The disinvestment programme is one such example. The basic idea was stake sale or outright privatisation of public-sector enterprises (PSEs) would improve the performance of such entities and also help the government raise resources. The public-shareholding norms of Sebi were intended to increase the public float of listed companies to enable market liquidity and better price discovery. However, in the case of LIC both the principles of disinvestment and public shareholding have been diluted. LIC was listed two years ago in May 2022 with a public float of just 3.5 per cent. The government was expected to sell its stake subsequently to achieve the stated listing norms. However, it has not happened thus far.

One reason for the government’s reluctance could be the performance of the LIC stock. After being issued at Rs 949, the share price slipped below Rs 540 in March 2023. Thus, a follow-on public offer would have fetched a much lower price. In fact, the stock price could have corrected further in anticipation of an increased supply of shares in the market. But this may also mean that the initial issue got more favourable pricing. Since the stock price recovered after the shock, the government could have sold its stake to comply with the public-shareholding norms. Given the LIC’s full market capitalisation of over Rs 6 trillion, the government would have raised a significant amount to push its capital expenditure programme and reduce the fiscal deficit. But this was not done.

However, irrespective of the price correction and possible political compulsion, events like these set avoidable precedents. It is worth noting that LIC is not an isolated case. The market data shows that there are more than 20 listed entities, including public-sector banks, where the government shareholding is above 75 per cent. In fact, it is 90 per cent or more in 12 companies. From a purely economic standpoint, it is puzzling that when the government is running a high fiscal deficit and aims to boost capital expenditure, it is not enthusiastically pursuing disinvestment. Since stock markets have also been supportive in recent times, selling stakes in PSEs to just comply with public shareholding norms would have given the government a significant amount of resources. More importantly, it would have avoided the need to make exceptions for PSEs.