The UNION Cabinet on Saturday cleared an amendment to the FDI Policy to allow foreign direct investment (FDI) up to 20 per cent under the “automatic route” in the state-owned Life Insurance Corporation. This comes ahead of its proposed initial public offer (IPO), which is expected to be the largest in the Indian capital markets so far.
“The change in FDI policy is sufficient to facilitate foreign investment in LIC up to 20 per cent,” said a government official noting that an amendment to the LIC Act, 1956, was not required.
As per industry estimates, the government expects to mobilise Rs 63,000-66,000 crore from the proposed share sale to meet its disinvestment target of Rs 78,000 crore for FY22. While LIC is yet to announce the IPO price, market estimates it to be Rs 2,000-2,100 per share.
The existing FDI Policy does not prescribe any specific provision for foreign investment in LIC, which is established under the LIC Act, 1956. The FDI ceiling for LIC has now been made at par with that of public sector banks.
While the government had last year raised the FDI limit in the insurance sector to 74 per cent from 49 per cent, it did not cover LIC that is governed by a specific legislation.
WITH just a month to go for the financial year to close, the government is doing all it requires to ensure that the LIC IPO is successful. Allowing FDI will ensure that foreign portfolio investors are able to purchase shares in the secondary market. It also sends a positive signal to investors.
“Since as per the present FDI Policy, the FDI ceiling for public sector banks is 20 per cent on government approval route, it has been decided to allow foreign investment up to 20 per cent for LIC and such other bodies corporate. Further, to expedite the capital raising process, such FDI has been kept on the automatic route, as is in the case of rest of the insurance sector,” a government source said.
Foreign investors may be desirous of participating in the IPO of LIC, and this change would facilitate FDI in LIC and such other bodies corporate, for which the government may have a requirement for disinvestment purposes, sources said.
On Friday, the National Stock Exchange decided to relax the eligibility criteria of Nifty equity indices and for replacement of stocks in various indices, reducing the minimum listing history of constituents from three months to one calendar month, effective March 31. This relaxation is expected to pave the way for LIC’s inclusion in the benchmark Nifty 50 Index. Since many passive funds allocate investments to indices and index stocks, the move, along with FDI permission, is expected to enable large inflows in the LIC IPO.
Once market regulator SEBI approves the issue, the IPO is likely to open for subscription in the second week of March and trading will commence by the third week, industry sources said. The government is going ahead with the listing of the latter’s shares, despite increased volatility in the markets amid increasing global concerns following Russia’s attack on Ukraine.
Sources said the government expects this move, along with other simplifications in FDI policy, to “make India an attractive investment destination”. FDI inflows into India rose to $81.97 billion in 2020-21, from $ 74.39 billion in 2019-20. “The FDI policy reform will further enhance Ease of Doing Business in the country, leading to larger FDI inflows and thereby contributing to growth of investment, income and employment,” they said.
FDI in currently permitted sectors is allowed up to the limit indicated against each sector/activity subject to applicable laws/regulations. “Insurance” is a permitted sector under FDI policy rules, however, it currently lists only Insurance Company and “intermediaries or insurance intermediaries” under the “Insurance” sector. LIC being a statutory corporation, is not covered under either of these.
Further, no limit is prescribed presently for foreign investment in LIC under the LIC Act, 1956; the Insurance Act, 1938; the Insurance Regulatory and Development Authority Act, 1999, or regulations made under the respective Acts. Therefore, this amendment has been made to specifically allow 20 per cent FDI in LIC.
In an interview with The Indian Express earlier this month, the Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey said that 20 per cent FDI should be sufficient considering that existing regulations and the requirements.
“…because LIC is not an insurance company, so insurance laws strictly does not apply to it, except for some of the provisions of insurance, which are indicated in the LIC Act itself. We have to retain 51 per cent by law. We cannot go below that. And even if we go for an IPO, we will be able to dilute only up to 25 per cent within the first five years. We can not go more than this as per the law. And then we have the law that no single person can own more than 5 per cent. So 20% (FDI) is more than enough for us, if we go for that route,” he had said.
As of September 2021, LIC policyholders had investments of Rs 39,49,516.37 crore on a standalone basis. This is more than 3.3 times higher than total assets under management (AUM) of all private life insurers in India and approximately 16.2 times more than the AUM of the second-largest player in the Indian life insurance industry in terms of AUM.
LIC held stocks worth a “carrying value” of Rs 9,79,843 crore (close to $130 billion), or 24.77 per cent of its total investments, as on September 30, 2021. The market valuation of LIC is expected to be more than Rs 10 lakh crore, putting it at par with top notch companies such as Reliance Industries and TCS.
The IPO of up to 31.62 crore equity shares comprises the net offer, employee reservation portion, and policyholder reservation portion. The IPO works out to 5 per cent of the total capital of 632.49 crore shares, with the government retaining the remaining 95 per cent.
A portion of shares, not exceeding 5 per cent of the offer, will be reserved for employees. Another portion not exceeding 10 per cent, will be reserved for eligible policyholders. Policyholders and employees are likely to get shares at a discount.
A minimum 35 per cent of the issue will be reserved for retail investors. The corporation may allocate up to 60 per cent of the QIB (qualified institutional buyers) portion to anchor investors on a discretionary basis. One-third of the anchor investor portion will be reserved for domestic mutual funds.
LIC’s share capital was increased to Rs 6,324.99 crore in September 2021 from Rs 100 crore earlier. The government’s offer for sale is 5 per cent of the capital. However, market sources said it’s unlikely that foreign holding will reach the 20 per cent of the capital unless it offers a stake directly to a foreign firm. This is unlikely to happen, they said.
According to LIC Act, an entity or a person can hold a maximum of 5 per cent stake in LIC and the government holding cannot fall below 51 per cent. Foreign holding in state-owned insurance companies GIC Re and New India Assurance is less than one per cent of the equity. Foreign holding in SBI, India’s largest bank, is 10.37 per cent.