The initial public offering (IPO) of Life Insurance Corporation of India (LIC) can take much longer and the entire process could extend beyond 2020-2021, according to foreign research house Macquarie.

The investment banking and financial services firm, in a note, cast doubt on chances of LIC hitting the IPO market in next financial year (FY21) following its interactions with actuaries and valuers.

The report pointed out that the first step towards valuing the IPO would be to split LIC's books into three parts -- the traditional PAR book, non-PAR book and shareholders' funds.

In insurance industry parlance, PAR stands for participating policy where the policyholder receives dividends from insurance firm. The non-PAR policy implies policies where policy holder does not get any share in profits made by the life insurance company.

"To extract value, they need to divide surplus in such a way that the benefits illustrated to PAR policyholders are maintained and the rest of the surplus is transferred to the shareholders’ account after assuring that in the non-PAR book there are enough assets to take care of liabilities," Macquarie said in its note.

At present, the entire surplus in LIC's books is distributed in the ratio of 95:5 (95 per cent to policyholders and 5 per cent to shareholders). This means that if there is surplus from any other category such as non-PAR book, it gets transferred to a common pool and distributed in 95:5 structure. On the other hand, private players operate with 90:10 ratio for only PAR policies.

Analysts say that if LIC wants to fetch a higher valuation, it may need to change its 95:5 structure.

"Theoretically, the EV today could only be the present value of five per cent of the surplus attributable to the shareholders, and that number is very low at Rs 20,000 crore - Rs 25,000 crore," Macquarie said in its note.

Analysts use EV, or embedded value, for valuing insurance companies.

"In case LIC were to mark up the net worth to current value of properties and gains sitting on the investment book (after splitting the book in 3 parts as shown above), then as per them (valuers and actuaries) LIC could trade at 1-times P/EV at best," the note added.

Also, the government would need to infuse capital in the insurer behemoth if it wants to float the IPO because of regulations laid down by the Insurance Regulatory and Development Authority (Irdai), according to sources.

"LIC’s paid up capital is only Rs 100 crore. Now, if we consider LIC’s large reserves then capitalisation is more than adequate. But Irdai's regulations don’t allow the use of reserves to maintain solvency margins towards capitalisation," the note pointed out.

On the legal front, LIC Act would need to be amended and LIC would need to be converted into a company under the Companies Act.