Updated: February 15, 2022 10:11:57 am
The mega initial public offering (IPO) of Life Insurance Corporation (LIC) is coming when markets are volatile and foreign portfolio investors (FPIs) are pulling out from Indian stocks in the wake of the US Fed tightening rates. But LIC’s 29-crore policyholder base is expected to help the IPO sail through.
Details of issue
The initial public offer 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.
LIC has calculated an earning per share (EPS) of Rs 4.70 and a return on net worth of 45.65 per cent for the fiscal ended March 2021. The net asset value per share is Rs 12.68 as on September 30, 2021.
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Sebi is expected to clear the offer within a few days, and the IPO process and listing are expected to be concluded by March 2022.
LIC IPO: What does it mean for the government and LIC?
The government will be entitled to the entire proceeds of the offer after deducting the offer expenses and relevant taxes thereon. LIC will not receive any proceeds from the offer. The government is expected to mop up between Rs 50,000 crore and Rs 1 lakh crore from the IPO, depending on the offer price. It will be a big boost to the government’s revenues and aid in bringing down the deficit.
For LIC, the listing of shares means higher visibility and profile. Investors will be able to actively trade in its shares on the stock exchanges. It also means more transparency — LIC, which is now answerable only to the government, will have to inform investors and exchanges details of all price sensitive information. In short, LIC will be accountable to investors, who are expected to demand high levels of corporate governance.
Who can apply and have reservation and discount?
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. While the corporation has not disclosed details, a 5 per cent discount on the offer price is expected.
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.
What are the challenges to the issue?
The IPO will hold the key to the government achieving its revised disinvestment target of Rs 78,000 crore for the current financial year — however, the market’s appetite for the mega issue could be a challenge.
Given that inflation has been a growing concern worldwide, and central banks around the world are looking to raise interest rates, equity markets are likely to remain under pressure in the near future. A rise in interest rates in the US and in other developed markets would mean that FPIs will pull out money from emerging markets especially from the equity markets and move them into US treasury bonds. Not only will this put pressure on the secondary market, it will reduce the liquidity availability for investments in primary market issuances. Given that the size of LIC issue could be well above Rs 50,000 crore, liquidity will be of essence.
A decline in equity markets in the near term would also reduce the government’s ability to command a higher premium. The government may have to settle on a lower price to make it attractive for the investors.
Investors will have to carefully look at the pricing of the issue, and do their due diligence on valuation. QIP participation will provide retail investors with an idea of the market’s interest in the issue.
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