LIC Reserves 10% In the IPO For Customers: Why Is It Good News?

Policyholders are likely to receive a 10 percent reservation in the upcoming LIC IPO. Depending on the fixed price band, policyholders will also receive the IPO shares at a discounted rate.

LIC IPO, expected to launch during the last quarter of the current financial year, is one of the most talked-about IPOs. It will be the most significant release in the history of the Indian primary market, even going by the most conservative estimation of the IPO size. With the 10 percent reservation, LIC policyholders who have bought 28.9 crore policies now can apply for IPO shares under the quota.

What are LIC rules regarding reservation?

The LIC (Amendment) Rules, 2021, states that any reservation the corporation makes in favour of its policyholders under Clause (a) of sub-section (9) of Section 5 will follow the same policies applied to a corporate offering reservation to its employees, stated under Securities and Exchange Board of India’s (SEBI) regulation.

The allotment of shares following the policyholder’s reservation in the IPO is made in consultation with the concerned stock exchange.

Per SEBI guidelines, any corporation offering IPO reservations to its employees can reserve up to 10 percent of the issue and extend a maximum of 10 percent discount on the floor price at which the shares are available to other categories.

What does the offer hold for the policyholders?

With the government planning a 10 percent reservation, LIC policyholders now have a reason to feel enthused by the LIC IPO. For the reservation size of 10 percent, the post-offer market capitalisation value can be Rs 10 lakh crore and reach up to Rs 15 lakh crore once the embedded valuation is done. As per SEBI’s current norms, for the company to reach Rs 10 lakh crore yardstick LIC will have to make an offer of Rs 55,000 crores IPO (or Rs 80,000 crore for Rs 15 lakh crore valuation).

Policyholders can now become investors by applying for LIC IPO besides earning bonuses from their existing policies. The IPO listing is unlikely to impact the dividends received by LIC policyholders. According to market experts, LIC will find new ways to generate the same level of returns.

What is the listing status?

Presently, the government is working on removing all possible hurdles from the LIC listing process and amended the LIC Act of 1956. LIC has appointed Arijit Basu, former MD of the State Bank of India and MD and CEO of SBI Life, as its new CEO, a post created after the recent amendment.

A panel led by the Finance Minister, Nirmala Sitharaman, will decide the final size of the IPO after the embedded valuation gets complete. Currently, the government is undergoing the process of finalising the merchant banks to lead the IPO offer.

Listing of LIC is critical for the government to achieve its divestment target, especially when plans to privatise two nationalised banks and one insurance company is yet to take off from the floor. The government targets to collect Rs 1.75 lakh crores through divestment in the current fiscal, and plans to meet any shortfall in the target with LIC IPO proceeds.

Why should investors feel enthusiastic about the offer?

By sheer size and market penetration, LIC is the largest public sector insurer in the country. With a first-year premium collection of Rs 1.84 lakh crore in March 2021, LIC commands 66 percent of the market share. As of March 31, 2020, LIC had total assets of Rs 37.75 lakh crore and an equity AUM of Rs 6.63 lakh crore. They are the largest institutional investors in the country with a huge investment portfolio to generate attractive profits.

However, market analysts believe that IPO share value will play a critical role in the offer’s success. Two other public sector investors – General Insurance Corporation of India Ltd and New India Assurance Co Ltd that got listed in 2017 are currently trading at a discount from their listing prices. Hence, if LIC wants to attract many investors, they need to keep the IPO price attractive.

The bottom line

The LIC IPO is expected to debut in the market at the end of FY22. The government has taken steps to expedite the IPO listing process under which LIC will adopt the corporate structure and publish financial reports under SEBI norms like any other listed company. It would add a lot of clarity to the functioning of LIC. However, one must note that despite divestment, LIC will continue with its sovereign structure and carry government assurance which is an immense comfort for FPIs and other investors.

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