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LIC IPO: The biggest IPO in the history of India

Updated: Jul 31, 2020

- By Aryan and Ishika|




The biggest surprises of Union Budget 2020 was the proposed Initial Public Offering (IPO) of Life Insurance Corporation of India (LIC). Life Insurance Corporation of India (LIC), the country’s largest institutional investor and the largest insurer, is the market leader in the life insurance industry both by premium collected, as well as the number of policies sold.


The government started the process to launch the IPO of Life Insurance Corporation (LIC) within this year. The IPO is expected to be the biggest in the Indian capital markets given the size and scale of LIC. The finance ministry invited bids from transaction advisors including consulting firms, investment bankers, and financial institutions for assisting the government in the preparatory processes leading to the IPO.


LIC of India could easily become the country’s top listed company if its shares are listed on the stock exchanges, points the report. They may rank number one in market valuation, beating the current leaders such as Reliance Industries and Tata Consultancy Services.

While the stake sale in the country’s largest and oldest life insurer will depend upon market conditions, the Finance Ministry has started work on finalizing modalities and seeking necessary approvals. LIC’s initial public offering will be significant in bringing transparency in operations of the Corporation while enabling the government to raise funds through disinvestment.


An IPO will bring transparency to the affairs of LIC as it will be required to share financial numbers and other market-related developments with the stock exchanges. Investors can benefit from picking up equity in the insurer, which has been making underwriting profit as well as profits on its investments. LIC’s investment in various equity and bond instruments will come under greater scrutiny after it lists on the exchanges.


However, a major issue with launching this IPO is whether or not the shareholders will find it attractive. At present, only 5 percent of LIC’s profits go to its shareholders while the remaining 95 percent go to policyholders. This means that policyholders get higher dividends and bonuses making LIC more attractive. As opposed to this, Private sector life insurers offer at least 10 percent of their profits to shareholders. When releasing a share Lic too will have to increase the amount of profits that it gives to its shareholders however following the footsteps of the private sector might mean losing its USP.

But this doesn’t necessarily mean LIC won’t perform well. The worth of insurance companies is measured using “embedded value” which is calculated on the basis of existing policies and the future profits that will be derived from it. Since LIC has the largest number of policies, its embedded value will not be affected by the ratio of profit distribution, still making it attractive.


Another issue is that even after the disinvestment of 10%, the government will still hold a 90% stake. This means they might choose to make moves that are for the welfare of the general public as opposed to the welfare of shareholders.


According to the tender document, the transaction advisors will have to assist the government on the modalities and timing of the minority stake along with detailed timelines for the entire process. They will also help the government in appointing professional insurance industry experts to assist in the stake sale and will evaluate the capital structure of LIC to determine the restructuring of the capital base. They will need to help LIC in preparing the ‘Restated Consolidated Financial Statements’ for the past three years for the LIC group including its subsidiaries, branches, and overseas operations.


Essentially, what we know for sure is that this is going to be a very interesting IPO however it comes with its fair share of problems. Will it take LIC to the top or topple its image remains to be seen.


Summary:


The biggest surprises of Union Budget 2020 was the proposed Initial Public Offering (IPO) of Life Insurance Corporation of India (LIC). The IPO is expected to be the biggest in the Indian capital markets given the size and scale of LIC. LIC of India could easily become the country’s top listed company if its shares are listed on the stock exchanges. They may rank number one in market valuation, beating the current leaders such as Reliance Industries and Tata Consultancy Services. This will lead to greater transparency in LIC as well as higher profits to the shareholders of the company. However, it comes with its fair share of problems.

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