Governments are always bad owners of businesses. If you have to invest in a government-controlled business, then this needs to be taken into account while you are weighing the pros and cons. Many seasoned investors stick to this principle and avoid all PSU stocks.
However, the impending IPO of the Life Insurance Corporation has given an interesting twist to this question. Some people feel that the LIC will be an exception to the 'No PSU Stocks' rule. To understand the issue, I'll explain what my perspective on PSU stocks is.
My starting point is people. All businesses are made successes or failures by the people who work in the business and run it. PSUs are not 'driven' organisations. Only people who have worked in both the private and public sectors understand this difference. At the human level, there just isn't the kind of urge to do better in the public sector. When business is bad, there just isn't the same kind of desperation to somehow protect and increase profits and therefore enhance shareholders' wealth. What's more, you can't really blame those who are running these companies when the majority shareholder's own priorities don't lie in increasing the value of its holdings.
This lies at the heart of why investing in the stock of public sector companies is fundamentally different. You are a minority shareholder in a business whose majority shareholder has completely different motives than yours. All things said and done, PSUs' business prospects, if they are good, will remain a function of some special circumstances created by their history. Generally speaking, either there's a monopoly or a business that is non-replicable for some historical reason. LIC started in the first category and then became the second, where it is now.
That by itself is no comfort at all. Companies like BSNL and Air India also travelled this path and look what happened to them. However, there is one reason that LIC is genuinely different from BSNL or Air India. For an insurance company, trust is an important product characteristic. In fact, you could even say that trust IS the product. As far as the customers are concerned, LIC is part of the Government of India. It won't go bust. Despite all the fanciness, a large proportion of the insurance-buying populace does not have the same degree of trust in private insurers. That means that being the government's insurance company is fundamentally different from being the government's telecom or airline company and so the BSNL-Air India kind of parallels don't really apply.
Thus, one could say that in the pros-vs-cons balance sheet of LIC's IPO, the government ownership factor is actually an advantage. Of course the original reasons I gave above for avoiding PSU stocks still apply. So, taking the best and the worst together, one could say that the advantage at least cancels out the disadvantage and so the LIC stock could be judged on its business prospects alone. While I won't go into the IPO from that perspective, suffice to say that it does not look bad at all. Still, there are a wide variety of viewpoints that investors have surely absorbed.
However, to me, the more important thing is to go back to some first principles: should individual investors be investing in IPOs at all? I believe the answer is no, and must always remain no, regardless of the IPO itself. In any IPO, there are far too many unknowns that are not there in the secondary markets. The information advantage is never with the investor. The ideal approach to IPOs, not just for new investors but all investors would be to not approach them at all. Stay away. You are not a professional who is obliged to have an opinion about every IPO. There are always better alternatives in the secondary markets at any point. You have a finite amount of money - why not put it in some stock where the price discovery is already done and which is better understood by the markets?
Also, check out our LIC IPO analysis story.