Supreme Court refuses to grant interim relief against LIC IPO

The Supreme Court on Thursday refused to grant any interim relief against the sale of the five per cent shareholding of the government in the Life Insurance Corporation (LIC) through an Initial Public Offering (IPO).

A Bench led by Justice D.Y. Chandrachud, however, issued notice to the government on the question whether the IPO would amount to “expropriation of surplus asset available to policy holders in favour of shareholders”.

The court also took note of the challenge to the amendments made to the LIC Act 1956 through the Finance Act 2021, which was passed as a Money Bill. It tagged the issue with a reference pending before a Constitution Bench that is examining the legality of the passage of amendments in the Finance Act as a Money Bill.

Violation of property rights

The petitioner, represented by senior advocate Indira Jaising and advocate Prasanna S., contended that the amendments made in the 1956 Act to facilitate the IPO amounted to “expropriation of surplus assets from policy holders to shareholders”. Ms. Jaising argued that this would entail a violation of property rights under Article 300A of the Constitution.

The Act originally required 95% of all of LIC’s annual surpluses to be allocated to the participating policy-holders and the remainder to be utilised at the discretion of the Central government. The 1956 Act had put a premium on the protection of the interests of the policyholders. The government was in the role of a “trustee and the custodian of the funds that are for the benefit of the policy-holders and policy-holders alone”, the petitioners, who are life insurance policy holders with LIC, noted.

The participating policy holders were given a share of the surpluses but they were also liable if LIC’s business suffered loss. In fact, the policy holders were the “true owners of the LIC”.

“The growth of the corporation was entirely owing to the contributions of premiums by participating policy holders who bore both the risk and the reward of the Life Fund maintained under Section 24 (as it stood prior to the 2021 amendment) of the LIC Act,” the petitioners argued.

Real owners of LIC

They said the amendments to the 1956 Act and the IPO attempted to cause a windfall to the future shareholders of the LIC at the expense of participating policyholders who are the real and true owners of LIC with a clear and demonstrable notional stake in it. The violation of the right to equality and property was further aggravated by the gross undervaluation of the LIC in the IPO, the petitioners said.

“A simple back of the envelope calculation shows that adopting the value realised by the peers such as SBI Life Insurance, HDFC Life Insurance etc (each listed as peers by the LIC IPO’s Red Herring Prospectus), indicates that the shares must be offered between Rs. 2132/- and Rs. 3386/- per share and not the Rs. 949/- being offered at the higher end, giving a windfall to the future speculative shareholders of the LIC at the expense of the interests of the policy holders,” the petition noted.

The policy holders said the amendments and the IPO were “unreasonable, manifestly arbitrary expropriatory act, which colourably seeks to deprive the vested rights of the policy-holders of LIC”.

Additional Solicitor General N. Venkataraman countered that Section 28 did not confer any contractual right to participating policyholders to appropriate 95% annual surplus. This was always dependent on the notification of the Centre.

The court noted in its order that 73 lakh applicants had subscribed to the IPO and it was subscribed over six times even in the category which has been reserved for policyholders.