The mega initial public offering (IPO) of Life Insurance Corporation (LIC) is coming at a time when the markets are showing volatility and foreign portfolio investors are pulling out from Indian stocks in the wake of the US Fed rate tightening. The vast policyholder base of 29 crore is expected to aid the IPO sail through in the present tough times.
Issue details
Initial public offer of up to 31.62 crore equity shares, comprising of the net offer, the employee reservation portion and the policyholder reservation portion. The IPO works out to five per cent of the total capital of 632.49 crore shares with the government retaining the remaining 95 per cent.
LIC says no part of the proceeds of the offer will be paid by the corporation to its directors, or key managerial personnel, “except in the normal course of business and in compliance with applicable laws”. Since the offer is an offer for sale and the corporation will not receive any proceeds from the Offer, it’s not required to appoint a monitoring agency for the offer. LIC has calculated an earning per share (EPS) of 4.70 and a return on net worth of Rs 45.65 per cent for the fiscal ended March 2021. The net asset value per share is Rs 12.68 as on September 30, 2021.
Sebi is expected to clear the offer within a few days and the IPO process and listing is expected to be concluded by March 2022.
What it means for the government and LIC?
The government will be entitled to the entire proceeds of the offer after deducting the offer expenses and relevant taxes thereon. LIC will not receive any proceeds from the offer. The government is expected to mop up between Rs 50,000 crore and Rs one lakh crore from the IPO, depending on the offer price. It will be a big boost to the government’s revenues and aid in bringing down the deficit.
For LIC, the listing of the shares means higher visibility and profile. Investors will be able to actively trade in its shares on the stock exchanges. It also means more transparency from the LIC side which was hitherto answerable only to the government. LIC will have to inform the investors and exchanges details about all price sensitive information after listing. In short, LIC will be accountable to the investors and meet their expectations. Investors are expected to demand high level of corporate governance from the corporation.
Who can apply and have reservation and discount?
A portion of shares, not exceeding 5 per cent of the offer, will be reserved for employees. Similarly, another portion not exceeding 10 per cent, will be reserved for eligible policyholders. Policyholders and employees are likely to get shares at a discount. While the corporation has not disclosed the discount details, market estimate is a five per cent discount to the offer price. LIC will offer a minimum 35 per cent of issue will be reserved for retail investors. LIC has asked policyholders to link PAN with the policy and open a demat account to apply for the shares.
The Corporation may allocate up to 60 per cent of the QIB (qualified institutional buyers) portion to anchor investors on a discretionary basis. One-third of the anchor investor portion will be reserved for domestic mutual funds.
What are the challenges to the issue?
Even as the IPO will hold key to the government achieving its revised disinvestment target of Rs 78,000 crore for the current financial year, the biggest challenge could be the market’s appetite for the mega issue. Given that the inflation has been growing concern worldwide and the central banks around the world are looking to raise the interest rates, equity markets are likely to remain under pressure in the near future. A rise in interest rates in the US and in other developed markets would mean that FPIs will pull out money from emerging markets especially from the equity markets and move them into US treasury bonds. Not only it will put pressure on the secondary market but even reduce the liquidity availability for investments into primary market issuances. Given that the size of LIC issue could be well above Rs 50,000 crore, liquidity will be of essence.
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A decline in equity markets in the near term would also reduce the government’s ability to command a higher premium for the issue. In order to help a large issue sail through, the government may have to settle down to a lower price in order to make it attractive for the investors.
Investors will have to carefully look at the pricing of the issue and do their due diligence on valuation. Whie QIP participation will provide them an idea on the market’s interest for the issue, retail investors can take a leaf out of their participation.