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LIC files paper for the biggest IPO ever in India
10 per cent of issue to be reserved for eligible policyholders, discount likely

India is embarking on the blockbuster listing of the country’s largest insurer as part of a wider privatization drive to bolster public coffers drained by the coronavirus pandemic and fund new infrastructure.

LIC IPO: India's Largest Life Insurer Files For Nation's Biggest IPO

Image: Bloomberg Quint

Life Insurance Corporation of India (LIC) has filed its draft share sale prospectus with the capital markets regulator SEBI. They paved the way for India’s largest initial public offering (IPO). There is also a possibility that LIC will become India’s most valuable listed company, toppling Reliance Industries Ltd, after listing on the stock exchanges.

LIC plans to sell 316.25 million shares, which is about 5 per cent of its total equity base, said the draft red herring prospectus filed with SEBI (Securities and Exchange Board of India). The 65-year-old LIC has a total equity base of 6.32 billion shares.

The draft prospectus filed by LIC on Sunday said that the six months ended September 30, 2021. The surplus in respect of LIC’s participating fund was allocated between policyholders and shareholders in the ratio of 95:5, but this ratio is set to change going forward.

“In accordance with our Corporation’s approved surplus distribution policy, the surplus in respect of the participating fund will be allocated between policyholders and shareholders in the ratio of 95:5 for Fiscal 2022, 92.5:7.5 for each of fiscal 2023 and fiscal 2024 and then 90:10 from fiscal 2025 onwards.”

To extract value from the national insurer, the government first had to create about $850 million in shareholder funds that LIC didn’t need; it did that by letting its dividends accumulate for a couple of years. Next, New Delhi will sell 5% of this puffed-up stake to narrow a $213 billion hole in its budget.

While the offer price is still undisclosed, the risk is that to make the sale appealing when investors globally are on the edge about U.S. monetary tightening and the risk of war in Ukraine. The government might sacrifice the long-term interest of small savers, the same people who funded the business and continue to make it tick.

LIC Value

LIC’s embedded value as of September 30, 2021, has been estimated at 5.39 lakh crore. Currently, private insurance companies trade at a multiple of 3-4 times embedded value.

However, embedded value is only an estimation of value based on several assumptions. The multiple attributes to an insurer could vary based on several qualitative factors. Considering its size. The dominant position in the market with 66 percent market share in new business premium, its growth rate may not match up to some of the nimble-footed private insurers.

A range of embedded values multiple between 2-3.5 throws up a valuation for the corporation ranging from Rs 10.7 lakh crore to Rs 18.7 lakh crore. Based on the total equity capital of 632 crore shares, the issue size for a 5% offer for sale works out from Rs 53,500 crore to Rs 93,625 crore.

The per-share price thus works out from Rs 1693 to Rs 2962. Against this, the government’s average cost of acquisition of shares stood at Rs 0.16 as LIC went through a capital rejig ahead of the IPO.

LIC’s initial capital, when it was incorporated, was Rs 100 crore. Since LIC was a collective, and not envisaged as a public limited company, there were no shares allotted.

To transform the corporation into a corporate structure with shareholders ahead of the public issue. The original capital of Rs 100 crore infused by the government during the inception of the corporation was converted into share capital by allotting shares of face value Rs 10 for an equivalent amount.

In September 2021, the corporation then allotted an additional 62.24 crore equity shares at the same face value against the free reserves outstanding in LIC’s book as of March 31, 2020.

About LIC

LIC was born in 1956 after 25 private insurance players went bust in India in the decade after World War II. Alarmed by the destruction of savings in the newly independent nation, and impatient to expand coverage beyond a tiny urban affluent class. A socialist-minded government nationalized the insurance business. They gave the state-owned firm just about $10 million in seed capital and an undisturbed monopoly.

The monopoly ended in 2000, but the moat remains intact. Even now, when it spars with nearly two dozen non-state rivals, LIC has a 64% share of gross written premiums; it issues three out of India’s four individual policies and holds 4% of all publicly traded shares in the country. The all-pervasive role that LIC plays in India’s financial life has made the IPO a contentious exercise.

Good Investment or Not.

LIC is a household name in India and has a strong grip on the life insurance market in the vast South Asian nation despite the entrance of private players.

The company is offering its millions of policyholders the opportunity to invest in the IPO at a discount. They promote the offer through television advertisements and full-page newspaper ads.

Analysts expect retail investors, including many first-timers, to show a strong appetite for snaring a stake in the venerable company. But there are numerous uncertainties for investors. These include question marks over whether investment decisions can be made by LIC management without interference from the government.

It is also unclear if LIC will be able to retain its market share, with increased competition for younger consumers from more tech-savvy new entrants to the market.

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