Planning to invest in LIC IPO? Here is everything you need to know

The 65-year old insurance giant has dominated the global markets by being the fifth largest life insurance and ranked 10th in terms of total assets.Dubai: India’s IPO season is in full swing with multiple IPOs geared up to make their stock market debut. One of the most awaited IPOs that has been creating buzz for a while in India is - the LIC IPO.

The Life Insurance Corporation of India, popularly known as LIC is set to go for one of the biggest initial public offerings (IPO) to date, as the Government of India will sell 5 per cent of its stake in the country’s largest insurance company. The LIC IPO is a part of a wider privatisation drive to bolster public coffers drained by the coronavirus pandemic and fund new infrastructure.

LIC controls two-thirds of the Indian market with almost 300 million policies. Given the sovereign backing and the mamoth size of this listing, the impact of this IPO is comparable to that of Saudi Arabia's Aramco or China's Industrial and Commercial Bank of China.

“LIC is one of India's biggest institutional investors, with significant stakes in Indian blue-chip stocks like Reliance, TCS, Infosys and ITC,” said Nikhil Kamath, founder of India's largest retail brokerage - Zerodha and True Beacon Global. “If an investor were looking to hold a stock long term- LIC would possibly be a better bet, especially taking into consideration the frothy values today.”

“As a new kid on the block, we are constantly hearing stories such as my parents bought Reliance when it was Rs10 and therefore all millennial investors tend to be on the lookout for the next Reliance,” said Sonal Ahluwalia, India-based Entrepreneur and trader. “However, we should not miss out on a chance to enter a well run, a well-capitalised, market leader which is unlikely to fail.”

“LIC is a safe bet and an IPO of this scale is a good time for new investors to enter the company.”

Asia's third-largest economy was already grappling with a prolonged slowdown even before the start of the coronavirus pandemic. India has recorded its worst recession since independence due to the COVID-19 crisis. Efforts to contain the spread of the virus, with stringent lockdowns, which inturn created a significant budget deficit and pushed millions into joblessness and poverty.

The IPO of LIC will give a boost to the government's efforts to raise much-needed cash through privatisations, which are running behind schedule.

The government has raised just Rs120.3 billion by selling stakes in various state-owned entities this financial year, well short of its target of Rs780 billion.

“The IPO is crucial for the government, which is facing revenue shortfall and huge expenditure in the pandemic and has pegged the fiscal deficit at 6.8 per cent of GDP this fiscal,” said Kamath.

LIC, once listed, would become the fourth publicly traded life insurer in India, after HDFC Life, ICICI Prudential and SBI Life. It could also become one of the most valued companies in India following Reliance Industries, Tata Consultancy Services (TCS) and HDFC Bank.

The IPO would propel India's insurance sector on a global map. The scale of such an IPO will also influence the liquidity and the sector.

The issue size is speculated to be around Rs600 billion to Rs1 trillion. It is to be the biggest IPO to date in the Indian stock market, beating Paytm's IPO by more than 5 times. Shares of the state-run insurer could be priced between Rs2,000 rupees to Rs2,100 rupees each. Its IPO document filed on February 13 put the insurance giant's embedded value at Rs5.4 trillion.

The issue was slated to run from March 10 to 14. However, India may review the timing of the IPO following Russia's attack on Ukraine.

"Ideally, I would like to go ahead with it because we had planned it for some time based purely on Indian considerations," Finance Minister Nirmala Sitharaman said in an interview. "But if global considerations warrant that I need to look at it, I would not mind looking at it again."

"When a private sector promoter takes this call, he has to only explain this to the company's board," she said, when asked if a call about delaying the IPO could be constrained by the government's annual disinvestment targets. "But I would have to explain it to the whole world."

The 65-year old insurance giant has dominated the global markets by being the fifth largest life insurance and ranked 10th in terms of total assets, according to a Crisil study.

According to various reports, the market capitalisation of the company after listing can be around Rs22 trillion. This would make it the largest company in India. Currently, Reliance Industries has the largest M-cap of around Rs16 trillion.

“LIC’s IPO is almost going to be $7 billion in size of which 50 per cent is going to be kept aside for retail investors which is roughly ($3.5 billion),” said Nisarg Trivedi, veteran investor. “With this, a lot of liquidity from the market would be sucked by this IPO, which might affect markets broadly.”

“Given the fact it’s the biggest insurance company in India, it definitely has a long term story,” said Trivedi. “However, with the general macro environment being uncertain coupled with IPO coming at fair valuation I would wait and watch and perhaps use some other opportunity to enter into LIC.”

LIC has reserved 10 per cent of the issue size for its army of policyholders and also plans to give some discount to such investors in the IPO. Not only policyholders, but employees of the insurance company also have a quote for themselves with 5 per cent of issue size reservation.

Only policyholders who have updated their PAN, can apply under the policyholder's quota. If you are a LIC policyholder and going to apply for an upcoming LIC IPO then you need a Demat account and also your PAN card details must be updated on your policy records

The LIC IPO should not change anything for its employees. As per the company management, this stake sale will not change the ownership of LIC as the government will sell not more than 5 per cent of its stake. So, LIC will still qualify as government-owned and not a privatised entity.

The listing of LIC will enhance transparency and governance in its operation as LIC will have to adhere to all listing requirements as per SEBI rules thereby boosting its efficiency.

LIC is governed by different laws than its peers, it enjoys a sovereign guarantee of its policies, allowing it to operate with a thinner capital base than competitors. “LICs listing will bring a greater public scrutiny into its investment decisions and portfolio,” said Kamath.

The insurance giant was created in September 1956, by merging and nationalising 245 private life insurance companies in India with an initial capital infusion of Rs50 million. It was the only life insurance company in India until the opening up of the markets in 2000.

The company holds a two-thirds share in the domestic life insurance market. It manages assets of Rs36.7 trillion, which equates to nearly 16 per cent of India's gross domestic product (GDP).

It has more than 100,000 employees and one million insurance agents.

LIC's real estate assets include big offices at prime locations in various Indian cities, including a 15-storey building in the southern city of Chennai and a distinctively curved head office in the heart of Mumbai's financial district.

As of September 2021, LIC’s assets under management were Rs39.6 trillion. LIC’s AUM is more than 3.3 times higher than the total AUM of all private life insurers in India; they are approximately 16.2 times more than the AUM of the second-largest player in the Indian life insurance industry SBI Life (AUM of approximately Rs2.4 trillion). The figure is also 1.1 times the AUM of the entire mutual fund industry in India - Rs36.7 trillion as of September 30, 2021.

As a government financier, LIC has had to bail out stressed lenders such as IDBI Bank and other PSU’s. It invested Rs2 trillion in IDBI Bank last year and acquired an 8 per cent stake in New India Assurance and General Insurance Corporation.

It is the largest subscriber of state and central government securities in 2017-18. Its total investment in central, state and other government-guaranteed marketable securities, loans, debentures and equity investments in the infrastructure and social sector is Rs19.5 trillion.

The Department of Investment and Public Asset Management (DIPAM) is the nodal government agency overlooking LIC's IPO which includes finalising the embedded value of LIC and completing the valuation of unlisted LIC shares. Finance Ministry had selected Milliman Advisors LLP India as the Reporting Actuary to derive the embedded value of LIC shares ahead of its IPO, Deloitte and SBI Caps are the pre-IPO transaction advisors.

The success of the IPO will depend on the autonomy of an institution that has had to rescue banks and state assets. “India is still highly uninsured - so there is a lot of scope for growth - with LIC garnering the lion share of the market there is a lot of promise,” said Kamath. “However, much is dependent on many external factors including changing customer preferences, the ability of such a mammoth organisation to make changes.”

“There is the additional challenge of a 65-year-old firm to compete with privatised peers. While being in the league of Saudi Aramco and China's ICBC, LIC was allowed to skip payments to the government for the last two years.”

“I think the LIC IPO is a great initiative from the government fiscal standpoint , however for investors I would say it’s a catch 22 situation,” said Yash Poddar- Co-Principal and CIO - Vikas Poddar Family Office.

“On one hand it’s difficult to ignore the largest insurance market player but the company scores lower in key metrics across operations, online market base and customer additions than private sector players.”

With inputs from agencies.