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Homechevron_rightBusinesschevron_rightNo need to repeal LIC...

No need to repeal LIC Act for divestment of stake


Chennai: There is no need to repeal the Life Insurance Corporation (LIC) Act 1956 and convert LIC into a company under the Companies Act, but the sovereign guarantee on the policy holders has outlived its utility and can be cancelled, said experts in insurance law and business.

Industry officials said the sovereign guarantee is not a factor either at the retail level or at the reinsurance of life risks underwritten by LIC.

The issue of repealing the LIC Act and the continuation of sovereign guarantee arose after Finance Minister Nirmala Sitharaman during her 2020-21 budget speech said the government will divest some portion of its stake in the Asian life insurance giant.

The Committee on Reforms in the Insurance Sector or popularly known as Malhotra Committee Report had recommended repeal of LIC Act and converting the LIC into a company.

"There is no need to repeal the LIC Act and convert that into a company under the Companies Act. The LIC Act is the life insurer's charter. Further with the amendment to the insurance laws, LIC is now subjected to all the insurance laws like any other private life insurer," D. Varadarajan, a Supreme Court advocate specialising in insurance/company/competition laws, told IANS.

According to him, the government has to amend the Section 5(1) of the LIC Act, which presently provides that the paid-up equity share capital of LIC shall be provided by the Central Government after due appropriation made by Parliament by law for the purpose.

"As regards divestment of shares through IPO, the same would be governed by the SEBI norms, which is not a big deal," Varadarajan said.

The moot question is whether the government would be inclined to do away with its statutory or sovereign guarantee provided to policyholders under section 37 of the LIC Act in respect of sum assured and the bonuses declared.

"It is, a reassurance to policyholders of LIC in contradistinction to the policyholders of other life insurance companies," Varadarajan said.

While the government has said the sovereign guarantee would be retained, industry officials said at the retail level or at the reinsurance level it does not have any major impact.

"People know LIC is owned by government. Its brand equity is another major plus point. So, sovereign guarantee is not a major policy selling point. Further when it comes to reinsurance contracts, the government ownership does not have any significance," a former CEO of a private life insurer told IANS preferring anonymity.

According to Varadarajan, there is robust statutory and regulatory regimen ensuring policyholder protection from all conceivable angles and it is for the Central government to decide on persisting with the sovereign guarantee.

He said Parliament, way back in the year 1999, through the IRDA Act, provided that LIC shall carry on life insurance business in accordance with the provisions of the Insurance Act, 1938.

"It is for the Central Government to decide on persisting with the sovereign guarantee. The intention of Parliament to keep LIC and other insurers even handed is manifest from the IRDA Act," Varadarajan said.

Citing public sector banks another industry official said: "There is no express sovereign guarantee to bank depositors."

When pointed out the existence of deposit insurance he said: "The situation that prevailed in 1956 when LIC was formed by taking over hundreds of private life insurers were different from the situation now."

Incidentally, the sovereign guarantee has not been put to use till date for LIC policyholders.

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