Explained | How will the LIC IPO benefit policyholders?

The story so far: The Centre is set to list India’s largest insurance firm, state-owned Life Insurance Corporation of India, on the stock exchanges to help meet disinvestment targets for the year. The Cabinet Committee on Economic Affairs approved the IPO in July. Earlier, actuarial firm Milliman Advisors was appointed to assess the embedded value of LIC. Currently, at least 16 merchant bankers, including global players HSBC, Goldman Sachs, Bank of America, Citigroup and BNP Paribas, are in the race to help manage the public issue. The government is expected to announce its choice shortly. Next, a Group of Ministers constituting the alternative mechanism on strategic disinvestment will approve the actual quantum to be placed on offer.

Why is LIC coming out with a public offering?

The government has in recent years found it difficult to meet disinvestment targets. Divestment of stakes in Air India and BPCL has been delayed for various reasons, including COVID-19, and may see fruition this financial year. The Centre has an ambitious disinvestment target of ₹1.75 lakh crore for FY22. A successful LIC IPO, in which the government will sell a sizeable stake, will help it meet this goal. While a date has not been announced, the listing of LIC is expected in the third or fourth quarter of 2021-22.

How much could the Centre mop up via the IPO?

Chief Economic Adviser K. Subramanian had said in March that the LIC IPO could fetch up to ₹1 lakh crore. While the LIC Act of 1956 has been amended to allow the listing, details as to the number of shares on offer or the price band are not yet out. The amendments allow for an increase in the authorised share capital of LIC to ₹25,000 crore divided into 2,500 crore shares of ₹10 each.

How will it benefit those with policies?

The government has said it would reserve up to 10% of the issue size in the IPO for LIC policyholders. The 2021 amendments to the LIC Act states “any reservation made by the Corporation in favour of its life insurance policyholders on a competitive basis in a public issue… shall be made in a manner similar to that applicable to a reservation on a competitive basis for employees in a public issue”. Markets regulator SEBI’s rules state the aggregate of reservations and firm allotments for employees in an issue shall not exceed 10% of the proposed issue amount. Market rules also set out that an issuer company can offer the shares to employees at a discount of maximum 10% to the floor price. There are reports that the government could offer a discount on the issue price for LIC policyholders. Currently, LIC pays 5% of its surplus to the government and the rest to policyholders. That could change as it will become accountable to shareholders for dividend payments. The sovereign guarantee by the government for policies, though, will continue post-IPO.

Why is there talk of a split IPO?

The stock market has seen numerous public offerings recently, such as food delivery facilitator Zomato’s ₹9,375 crore mop-up. Overall, investors were hungry enough to absorb ₹27,000 crore in IPOs between just April and July. Financial services provider Paytm has also lined up an IPO worth ₹16,600 crore — making it the largest so far in India, topping Coal India’s ₹15,200 crore offering in 2010. By the time the LIC IPO hits the road, investors may not have enough appetite to absorb the entire offering at one go. Splitting the IPO in two parts with the second tranche being a follow-on offer would make it a first-of-its-kind offering in the country.

What changes did SEBI make to smoothen LIC IPO path?

In February, SEBI tweaked its rules to allow promoters of companies with a market capitalisation of ₹1 lakh crore post-IPO to reach 10% public shareholding in two years and raise that figure up to 25% in five years. Earlier, any company with a market cap of ₹4,000 crore and above had to achieve 25% public shareholding in three years.

Also read | Attempts to privatise LIC will fail once again: AIIEA general secretary

Why is the market agog with expectation for this IPO?

Life insurance in India is still nascent, with only about 2.82% penetration as of 2019, according to insurance regulator IRDAI. So, the addressable market is huge. Two, about two decades after private players have been allowed entry, LIC’s market share is still at a high of 66.2%, as per IRDAI’s FY20 report. According to primeinfobase.com, the value of equity holdings of LIC, India’s largest institutional investor, touched an all-time high of ₹7.24 lakh crore as on March 31, 2021 — across almost 300 companies in which it had at least 1% stake.