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Thursday, July 29, 2021

Explained: A look at LIC’s mega IPO, and its customers

In the upcoming listing, up to 10% of the issue size will be reserved for LIC policyholders, who can also look forward to a discount. Why do analysts see promise in the IPO, and what are the challenges for LIC?

Written by George Mathew , Sandeep Singh | New Delhi |
Updated: July 29, 2021 9:23:46 am
The Cabinet recently approved the disinvestment of equity in LIC. The process of appointing merchant bankers to launch the IPO is on. (Express Archive)

As investors wait for the mega public offer of Life Insurance Corporation later this year, LIC policyholders who have bought over 28.9 crore policies, too, have now got reason to be enthused. The government has said that up to 10% of the issue size in the IPO would be reserved for LIC policyholders. There could be a discount on the floor price.

What are the LIC rules on such reservation?

The LIC (Amendment) Rules, 2021 say that any reservation made by the Corporation in favour of its policyholders on a competitive basis in a public issue under Clause (a) of sub-section (9) of Section 5 should be made in a manner similar to that applicable to a reservation on a competitive basis for employees in a public issue under any regulation made and circular issued by the Securities and Exchange Board of India.

The allotment of equity shares to life insurance policyholders against any reservation made in their favour should be made in consultation with the stock exchanges concerned.

According to IPO norms, an issuer company can offer the shares to employees at a discount of a maximum 10% on the floor price at which the shares are offered to other categories.

LIC IPO: What’s the status of the listing plan?

The Union Cabinet recently approved the disinvestment of equity in LIC. The process is on to appoint merchant bankers to launch the IPO. A panel headed by Finance Minister Nirmala Sitharaman will decide on the size of the share sale. The government has amended the LIC Act of 1956 for the proposed IPO. The LIC has appointed Arijit Basu, former MD of State Bank of India and former MD & CEO of SBI Life, who had led the move to get LIC listed on stock exchanges, as a consultant to help launch the IPO.

After the amendment, like any other listed company, the corporation, now governed by the Companies Act and SEBI Act (post-IPO), has to prepare its quarterly balance sheet with profit or loss figures and make public key developments. Budget amendments to the LIC Act have been notified and the actuarial firm will work out the embedded value of the insurer in the next couple of weeks.

How will policyholders benefit?

If the government offers a 10% discount to policyholders, then, by a conservative estimate, the post-issue market capitalisation is likely to be around Rs 10 lakh crore, and can go up 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% of Rs 9 lakh crore). If the market capitalisation is Rs 15 lakh crore, the IPO size would become Rs 80,000 crore.

While it may appear that LIC policyholders would get a lower bonus after the IPO than they are getting now, sources said it may not happen that way: The LIC will find new ways to continue offering the same bonus.

Pricing of the issue will be 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. New India Assurance shares, initially offered in the range Rs 770-800, are now quoting at Rs 161, while the price of General Insurance Corporation shares have fallen from Rs 912 to Rs 174.60.

However, both companies issued one bonus share for every share held between June and July 2018. That means that if an investor had one share of GIC at Rs 912, he/she would be holding two shares worth Rs 174.60 each. That would still mean a loss of over 60% of his/her investment in the IPO.

Why is the LIC IPO important for the government?

The listing will be crucial for the government to meet its disinvestment target, especially when its plans to privatise two public sector banks and one insurance firm have not taken off yet. The government aims to mop up Rs 1.75 lakh crore in the current fiscal from minority stake sale and privatisation. Of this, Rs 1 lakh crore was to come from selling its stake in public sector banks and financial institutions, and Rs 75,000 crore as CPSE disinvestment receipts. The LIC IPO is expected to meet the shortfall in that target.

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Why should investors look forward to it?

In LIC’s size and reach, market participants see great potential for future growth. As the largest life insurer in the country with a total first-year premium of over Rs 1.84 lakh crore in the year ended March 2021, LIC commands a market share of over 66%. It has 2.9 lakh employees, and a network of 22.78 lakh agents. As of March 31, 2020 it had total assets of Rs 37.75 lakh crore and equity AUM of Rs 6.63 lakh crore.

Industry insiders say that even if the 22 lakh agents sell one additional policy in a year, it will add huge volume. Besides, LIC is the biggest institutional investor in India and has a huge investment portfolio that can generate big investment returns.

“Even a marginal per-employee-business-productivity improvement every year for the next few years would result in raising business volumes that are higher than the actual size of a few mid-sized insurance firms,” said a market expert.

It is also important to note that while LIC will go for a corporate structure and will have independent directors, it will continue to have the sovereign guarantee that could provide a big comfort to FPIs and other investors. This means the government would provide it capital if the need arises.

For LIC, the challenge lies in bringing efficiency across the large agent network and also in maintaining its market share.

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