Decks are being cleared for the mega listing of Life Insurance Corporation of India (LIC), India’s largest financial institution with assets of over Rs 32 lakh crore. The government is systematically removing hurdles in the way, and market regulator SEBI has relaxed norms to make the listing process smoother.
What has SEBI done to smoothen the LIC IPO process?
Currently, issuers with a post-issue market capitalisation of Rs 4,000 crore are required to offer at least 10 per cent of the post-issue capital to the public and achieve a minimum public holding of 25 per cent within three years. SEBI has now said the issuer needs to make an offer of Rs 10,000 crore and 5 per cent of the incremental amount beyond Rs 1 lakh crore. The size will ultimately depend on the valuation.
What does SEBI’s decision mean?
By a conservative estimate, the post issue market capitalisation is likely to be around Rs 10 lakh crore; it can go to Rs 15 lakh crore once the embedded valuation is known.
As per the new SEBI rule, on a Rs 10 lakh crore market capitalisation yardstick, LIC will have to make an issue of Rs 55,000 crore (Rs 10,000 crore plus 5 per cent of Rs 9 lakh crore). If the market capitalisation is expected to be Rs 15 lakh crore, the IPO size would become Rs 80,000 crore. If it’s Rs 8 lakh crore, the IPO size would be Rs 45,000 crore. Still, this IPO will be the largest to hit the Indian capital market.
When is the IPO expected?
The IPO is expected in the third quarter of the new financial year. The economy is on the comeback trail and stock markets are buoyant. The government has announced that up to 10 per cent of the IPO issue size would be reserved for policyholders. LIC currently services almost 30 crore policies across the country, and smooth sailing is expected for the IPO.
Besides the strength in the equity markets, the issue could also benefit from the huge global liquidity in financial markets, and the continuing strong inflow of foreign portfolio investments. A large issue of LIC would need support from all investors — FPIs, DIIs, HNIs and retail investors.
FPIs have invested a record net Rs 2,61,968 crore into Indian equities in the current financial year. Inflows are likely to continue on account of additional stimulus in the United States and other countries, and is likely to benefit the issue.
What has happened on listing formalities so far?
The government has made The LIC Amendment Act part of the Finance Bill, thereby bringing the required legislative amendment for launching the IPO. Although LIC is currently under the supervision of the Insurance Regulatory and Development Authority, it is governed by the LIC Act of 1956, which enables LIC to obtain a special dispensation in several areas, including higher stakes in companies.
The Department of Investment and Public Asset Management (DIPAM), which oversees the government’s equity in public sector firms, has already selected actuarial firm Milliman Advisors for ascertaining the embedded value of LIC. Deloitte and SBI Caps have been appointed as pre-IPO transaction advisors.
How did LIC perform against the backdrop of the pandemic?
The corporation’s composite market share in number of policies and first year premium was 67.82 per cent and 70.57 per cent respectively for the period ended September 2020.
LIC, a contrarian investor, took every available opportunity in the market, investing more than Rs 2,60,000 crore in debt and equity (as of September 2020) compared to Rs 2,44,931 crore invested last year during the same period.
It booked more than Rs 15,000 crore as profits in the capital market until September. LIC has achieved more than Rs 25,000 crore in first year premium income in individual new business performance in the half year as compared to Rs 24,867.70 crore in the same period of last year.
It also settled more than 82 lakh claims amounting to more than Rs 48,000 crore.
Will the pricing be critical?
Pricing of the issue will hold the key, especially given the past experience with public issues of two general insurance companies — General Insurance Corporation of India Ltd and New India Assurance Co Ltd — that got listed in 2017.
In the case of the New India Assurance IPO, shares that were offered to investors in the range of Rs 770-800, are now quoting at Rs 164. General Insurance Corporation offered its shares at Rs 912, but prices have come down to Rs 170.
However, both companies issued one bonus share for every share held by shareholders between June and July 2018. That means if the investor got one share of GIC at Rs 912, she would be holding two shares (one allotment, the other bonus) of Rs 170 each – and sitting on a loss of 62 per cent over her investment in the GIC IPO.
While the issue will help the government raise much needed capital to fund its planned expenditure, investors will have to carefully analyse the issue before investing.
What could attract investors to LIC?
Market experts say the sheer size of LIC — its total first year premium of over Rs 1.75 lakh crore in the year ended March 2020, its agent network of over 22.5 lakh individuals, the real estate assets that it owns across the country — is a draw in itself, and there is huge growth potential. Industry insiders say that if 22 lakh agents sell even one additional policy in a year, it will add huge volume. Besides, LIC is the biggest institutional investor in India with a huge investment portfolio that can generate big investment returns.
“During listing, incoming investors would benefit from LIC’s size and scale dominance. Even a marginal per-employee business productivity improvement every year for the next few years could bring much bigger business volumes than the actual size of some mid-sized insurance firms. As an owner wanting to realise better gains, the government will surely structure the governance to reflect the respect it deserves as a globally large life insurance company,” said Srinath Sridharan, an independent markets commentator.
It is also important to note that while LIC will have a corporate structure and independent directors, it will continue to have the sovereign guarantee, which could provide comfort to FPIs and other investors.
But there are some concerns, too. A financial services sector analyst with a leading brokerage said that if bringing efficiency across its large number of agents is a big task, the insurer will also have to ensure that it doesn’t lose its market share to private players in a big way.
Also, the government is looking for a high valuation, and investors will have to analyse the issue price closely before subscribing, experts said.
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