In a bid to replenish the public coffers that have been drained out by the pandemic, India is planning one of the biggest IPO listings ever.
On 13 February, the state-run Life Insurance Corporation of India (LIC) filed its draft red herring prospectus with capital markets regulator SEBI. According to the filing, the government, which owns 100 percent stake in the company, is offering 31.62 crore equity shares or a 5 percent stake in the IPO.
There's been a positive response among retail investors to the IPOs launched in the past year – but what is the temperature around the LIC IPO listing?
But First, How Will the LIC IPO Help the Government?
With the Indian economy taking a big hit owing to the COVID-19 pandemic, at such a time, the benefits for the government are obvious.
"The government needs the proceeds of disinvestment to fund the infrastructure projects and other expenses that have built up due to the costs of the pandemic," Monika Halan, author and adjunct professor at the National Institute of Securities Markets (NISM), told The Quint.
"The Indian stock market needs this IPO to provide breadth and depth. India has a problem of few large scale firms and, therefore, fewer stocks that can absorb the investments, both Indian and foreign, that are flowing."Monika Halan, Adjunct Professor at NISM
Since it's completely an offer for sale, all the proceedings will directly go to the government, which has set a divestment aim of Rs 78,000 crore in this year's Union Budget. The promoter for the sale is President of India, acting through the Ministry of Finance, Government of India.
While the offer price hasn't been disclosed to the public yet, analysts say that the potential valuation of this could turn out anywhere around Rs 10-15 lakh crore.
"Depending on the shares on offer, this would give the government a handsome amount as divestment proceeds," Niraj Shah, Markets Editor at BloombergQuint, said.
What's the Buzz – To Invest or Not to Invest?
LIC has been a household name in middle-class families since it was created in 1956. Expectedly, there is a big buzz about its IPO. "But don't confuse the policy buzz with the market buzz," warned Madhavan Narayanan, a senior journalist.
The behemoth enjoyed a total monopoly for more than four decades, till the late 90s until the sector was opened to the private players. And, although its market share has shrunk to 64.1 percent in 2020, it is still the country's largest life insurer, holding two-thirds of the insurance market share.
"The IPO is ticking many boxes. The largest IPO coming into a bull market with shares of a company that has been synonymous with life insurance in India. And there is a discount sweetener for policyholders," Halan added.
As per the filing, there will be some discount for policyholders and employees as well. Moreover, 10 percent of the LIC shares will be reserved for policyholders and 5 percent of the offer for employees.
But should you be investing in it? There's no simple answer to that. "Retail investors are better off approaching the stock market through a mutual fund. It is incorrect to look at an IPO as a lottery," she said.
"It is a large issue and has most households as customers. But the investibility is undecided as yet. There are a lot of readjustments that need to be done, and it will take time to analyse all that before deciding if it is investable or not," Niraj Shah added.
Narayanan also pointed out that the mood of the market and the timing would decide the investibility.
"It’s not the company, rather it’s a combination of market mood, market appetite, the timing and the valuation that matters. And, valuation itself is complicated, particularly when it’s an insurance company. So, we can’t jump into any conclusions before seeing the pricing.”Madhavan Narayanan, Senior Journalist
The embedded value of the LIC has been set at over Rs 5 lakh crore. The media reports have projected LIC's market valuation at around four times the embedded value, which would make LIC the largest listed company in the country.
What Does This Mean for its Policyholders?
LIC boasts of nearly 30 crore policyholders. The company has been running advertisements, asking its policyholders to link their PAN with the policy – and to open a demat account to be able to buy shares at a discounted price.
But experts say that LIC policyholders may not see any major impact in the short run.
Monika Halan was of the opinion that "the sharper scrutiny of the capital market regulator is good for the policyholders in the long run. Ideally, it should have been IRDAI to put in place global best practices in product structure, commissions, disclosures and suitability metrics."
Narayanan also added that this listing has triggered a debate on whether policyholders are at a risk of being shortchanged.
"Surplus has to be distributed, and historically, it has been given to policyholders, but now it will be given to investors as well. So, now there is a debate on whether policyholders have been shortchanged. One way is to simply convert policyholders to shareholders,” he said.
What Does This Mean for LIC?
Prosenjit Datta, former editor of Businessworld and Business Today magazines, felt that not much would change fundamentally for the insurance company.
"The government used to be a 100 percent owner, now it will be a 95 percent owner. This doesn’t change anything. The management will still be chosen by the government. If the management fundamentally doesn’t change, I don’t see how one gains from it.”Prosenjit Datta, former editor of Businessworld and Business Today
"However, having been listed, if the Indian insurance market takes off, it could mean a good, ascertainable value attached to the company, which is always useful," journalist Shah said.
But will there be challenges in the listing itself?
The Centre is looking to conclude the IPO by March 2022. Narayanan said the government will have to be cautious on both the pricing and the sizing.
“The pricing is a Catch-22 situation because it’s a public sector undertaking. If they overprice it, the market may not like it or if they underprice, people might say that the family jewels are being sold cheap," he said, adding that "the Ukraine crisis, US Federal Reserve hikes and the inflation in India are already turning down the mood right now."