Mega LIC IPO Inching Towards Reality

India’s biggest listing is inching towards reality as the central government expects to launch the initial public offering for state-owned insurer Life Insurance Corp. of India in the fourth quarter of the ongoing financial year.

According to two people privy to the development, the process of appointing merchant bankers will likely be concluded within two weeks, following which the government will file the draft red herring prospectus and hold roadshows for interested investors.

Kickstarting the process for LIC disinvestment, the government on July 15 invited bids from merchant bankers and legal advisors for the proposed initial share sale.

The Department of Investment and Public Asset Management is expected to appoint up to ten merchant bankers and one legal firm for assisting and advising on the stake sale.

The first of the two people cited earlier said the government is also working on consolidating the accounts of LIC and its subsidiaries, which is a prerequisite to file the DHRP.

LIC has three subsidiaries:

The launch of LIC’s IPO is key to the central government meeting its disinvestment target of Rs 1.75 lakh crore in FY22. Of this target, Rs 1 lakh crore is expected to come from financial institutions, the first person said. Earlier, the Chief Economic Adviser had estimated the same.

Finance Minister Nirmala Sitharaman had announced in her budget speech in February the decision to list LIC. Earlier this month the cabinet committee on economic affairs cleared the initial public offering proposal, Bloomberg had reported.

The biggest task for the government would be to calculate the embedded value of LIC before going ahead with the listing. According to the second person quoted above, the process of valuation is currently on and it will be a lengthy and complicated task.

It’s only after the valuation is done the size of divestment and hence IPO will be determined, the person said. However, the government, which owns 95% stake in the insurer, may decide to list anywhere between 5-20% depending on the embedded value.

India’s largest life insurer has a 67.52% market share by new business premium as of June.

A financial services industry expert, Parekh said valuation is a tricky challenge because the government has to take into account both the intrinsic as well as the emotional value of LIC’s stock.

The government may regret if they price their stake sale too low or too high, Parekh said.

LIC’s total policyholder investments is Rs 34 lakh crore as on March 31, 2021, its annual financial statement shows.

With the launch of the IPO, some policyholders will become shareholders as the government plans to reserve 10% of the issue for them, the second person said.

According to Parekh, giving policyholders a chance to participate is an interesting proposition, however, the only caution is the price at which it is offered.

If it’s too expensive and institutional investors don’t come forward, the price discovery wont give the government a positive response. Further retail investors will be guided by what’s announced by the government then, Parekh said.

Amit Tandon, managing director at Institutional Investor Advisory Services, said the LIC IPO will attract both retail and institutional investors equally.

“If LIC use their agents to sell it then they can push the product for retail investors. For institutional investors, if you look at a company with such a large market cap, it is not something they can ignore,” Tandon said. “These two sets of investors should line up.”

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