LIC IPO: Government will benefit but will the policyholder

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LIC IPO: Government will benefit but the policyholder bonus will be scissored from IPO. Investors are eagerly waiting for the Mega IPO of the country’s largest insurance company Life Insurance Corporation of India i.e. LIC. The company has submitted the initial documents (DRHP) for the IPO with the country’s market regulator Securities and Exchange Board of India (SEBI). The government is expected to get a lot of money from this. But, on the other hand, this IPO will cut the bonus received by the policyholders of LIC’s participating policies.

Participating policyholders get a share in the benefits of LIC.

According to a report by Moneycontrol, LIC has been giving a large part of its profit i.e. cash surplus to policyholders as a bonus, which will decrease in the future after the IPO. LIC said in the draft prospectus filed on Sunday that till the half-year ended September 30, 2021, the surplus of LIC’s participating fund was allocated in the ratio of 95:5 between policyholders and shareholders.

The ratio will change further

According to the draft paper submitted by LIC with SEBI, in accordance with the approved surplus distribution policy of the corporation, the surplus attached to the participating fund will be allocated between the policyholders and the shareholders in the ratio of 95:5 in FY 2022. It will be allocated in the ratio of 92.5:7 in FY 2023 and 2024 and in the ratio of 90:10 from FY 2025. In this way, it will decrease year after year.

95% bonus provision

According to the original LIC Act, LIC will distribute 95 percent of the profit earned every year as a bonus to the participating policyholders. However, by amending this act in 2011, it was made mandatory for LIC to distribute at least 90 percent of the surplus of the policyholder’s fund (regardless of which business is generating surplus). This should be given as a bonus to the participating policies before paying the dividend to the shareholders. Between 2012 and 2021, shareholders were entitled to a maximum of 10 percent of the surplus from all businesses, but LIC continued to pay only 5 percent of the surplus to shareholders.

New distribution policy will be heavy on policyholders

The new distribution policy will further reduce the pool of cash surplus to be distributed among the participating policyholders. This is also due to the division of the Consolidated Fund of Life Insurance Corporation of India between the participating policyholders and the non-participating policy funds. Participating policyholders will now get the benefit of the profit pool only in their respective funds. Earlier they used to get profit on the entire profit pool. In contrast, shareholders such as the government and the new shareholders after the completion of the offer for sale will get the benefit of the entire surplus as compared to the policyholders’ fund.

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