What you must know about the upcoming LIC IPO

While the filing of the draft red herring prospectus is expected to happen by December, the actual IPO is expected in March so that the government can show the divestment proceeds in FY22. Here are some key takeaway points.

A lot has already happened on the LIC IPO front and a lot is yet to happen. One thing is certain, for the time being, that the LIC IPO will happen in FY22 i.e. before 31-Mar 2022. After all, the government has an aggressive disinvestment target of Rs175,000cr for FY22 and there is no way of getting anywhere close to that mark unless LIC divestment happens.

Here are key 10 things about the proposed IPO.

What you must know about the LIC IPO?

While the filing of the draft red herring prospectus is expected to happen by December, the actual IPO is expected in March so that the government can show the divestment proceeds in FY22. Here are some key takeaway points.

1. In terms of progress, LIC has already appointed Cyril Amarchand Mangaldas as the legal advisor and KFIN Technologies as the registrars to the IPO. In addition, the 10 investment bankers consisting of 5 global outfits and 5 Indian investment bankers have also been appointed.
2. The next important step is to get the actuarial valuation of LIC done, which is under process and Milliman Advisors of the US is already working on it. Once the actuarial valuation is decoded, that will form the basis for pricing of the IPO.
3. Currently, the government owns 100% stake in LIC and it is considering to offload 5-10% stake in the insurer. The issue size is expected to have a median size in the range of Rs70,000cr to Rs100,000cr. However, it will depend on valuations and the government is yet to finalize whether the IPO will happen in one tranche or two tranches.
4. In the price setting, one thing that will weigh on the mind of the government is the previous experience of New India Assurance and GIC Re. In both cases, the pricing was too aggressive during the IPO in 2017, and the stock prices are still at a deep discount to their IPO price. Government will not want a repeat of that story.
5. The LIC IPO will have a 10% reservation for policyholders and a reservation for employees too. That is hardly surprising. Currently, LIC has 2.92 lakh employees and a total of 22.70 lakh agents. This captive base is large enough to make a substantial impact on the demand for the LIC IPO.
6. LIC is a dominant player in the life insurance business and India’s largest institutional investor. Even after 25 years of private insurance players operating in the Indian market, LIC still corners 72% market share. In terms of its investment portfolio of Rs31 trillion, LIC alone is equivalent to 84% of the entire Indian mutual fund sector.
7. LIC’s balance sheet size of $500?billion is just below SBI at $550 billion. Clearly, LIC is not just a dominant player in the life insurance space, but also in terms of being an investor in the equity and debt space in India. However, everything will eventually boil down to the actuarial valuations that Milliman assigns to LIC.
8. LIC is expected to have a market cap of around Rs9-10 trillion to begin with. That will put LIC at par with 3 of India’s most valuable companies in terms of market capitalization viz. Reliance Industries, TCS and HDFC Bank. It is likely to be included in indices and in Futures and Options much earlier than the norm, considering its size and heft.
9. Two areas of contention still remain for LIC. The first is the amount it can and proposes to distribute as dividends. Currently, LIC gives 95% of profits?as bonus to policy holders and only distributes 5% as dividends. Most private players distribute 10% as dividends. Secondly, for now, the sovereign guarantee on policies will remain, but it remains to be seen for how long the government plans to continue that.
10. One question that is likely to come up in the IPO is the gross NPAs of the debt portfolio which has shot up from 1.5% to 6.5% in recent years. Many of the debt investments are fairly illiquid. This may be small in the overall scheme of things, but could be a drag if equity markets do not give these kind of robust returns.

The big challenge for LIC will be to get used to a new normal of transparency like exchange filings, quarterly results declaration, shareholding reporting and greater public scrutiny. As has been the experience, such transparency is only for the better.