LIC IPO success to expedite disinvestment of other government-owned assets

Since January, Mumbai-based financial planner Shweta Pawar has been getting inquiries from her clientele regarding Life Insurance Corporation's (LIC's) initial public offering (IPO) on an almost daily basis. "People want to have the stock in their portfolio. Even those who usually invest only after thoroughly researching a company on the Internet have been calling to check on the tentative schedule of the listing," said Pawar, who is a licensed LIC agent for more than 16 years.

Established in 1956, the state-owned life insurer controls a two-thirds share of the market. The initials 'LIC' have become synonymous with not only life insurance products but also a safe investment for millions of Indians. Recently, it was ranked the world's third strongest insurance brand by UK consultancy Brand Finance. The draft red herring prospectus (DRHP) filed with the stock market regulator Securities and Exchange Board of India (SEBI) on Sunday evening puts LIC's embedded value at Rs 5.39 lakh crore as of September 30, 2020.

It is, therefore, not surprising that investor interest in the 31.6 crore shares on offer, denoting the company's 5 per cent equity, runs high. However, the matter doesn't end there. It is also important as a large section of economists and analysts alike are distressed at the prospect of the country again missing the disinvestment target for the third straight year.

"The overall performance on the disinvestment front this year is particularly disappointing because market conditions were extremely favourable. The private sector has raised record sums. However, the government's underperformance on this front is nothing new. It raised Rs 32,845 crore compared to the target of Rs 2.1 lakh crore last year," Rajeev Shah, director and CEO of Ahmedabad-based RBSA Advisors, told BusinessToday.In.

A successful listing of the life insurance behemoth will help expedite the disinvestment of other government-owned assets.

"The size of the Indian insurance market with a CAGR of 15 per cent makes it a compelling investment. Here, LIC already has a 60 per cent market share. After the listing, it is bound to have the highest market capitalisation among the country's financial services players. And if this journey continues, its base will get expanded further," observed Deven R Choksey, managing director at KRChoksey Holdings.

Also Read: LIC IPO: Expected price band, market share, financials; 10 things to know

Among other things, a successful listing will also show the high degree of confidence that prime minister Narendra Modi-led NDA government has in its economic reforms agenda

Listing to determine equity markets' breadth, scope

LIC's listing will set the benchmark in the government's ability to divest a huge stake in the primary markets to raise much-required funds to bridge the fiscal deficit, which was revised upwards to 6.9 per cent from the estimated 6.8 per cent for FY2021-22.

"If LIC divestment goes through smoothly, it will also mean that Indian equity markets have the breadth and scope to absorb such a large amount of stock issued by the government and as well the liquidity to buy it. If there is a huge FII subscription to the IPO, that will be a certificate of confidence that global risk capital has for the Indian economy and markets. That will set the stage for future fundraising by the government in form of divesting stake to retail and institutional investors in other large public sector assets," opined Sumeet Mehta, the CEO of boutique investment bank Paradigm Advisors.

The market sentiment concerning LIC divestment is mixed as it has for long been considered as the colossal financial institution that always comes to the government's rescue in a crisis -- be it pumping in money in scam-hit public sector banks by increasing stake in them or helping the government meet its disinvestment targets by picking up equity in public sector enterprises. Disinvestment may thus lead to a change in its basic business model, shifting the focus from meeting social obligations to seeking higher returns.

"Over the years, LIC has been the biggest institutional investor for the government, with it backing other government companies in their IPOs and by providing financial support to other entities including state governments. The divestment of the stake in LIC, some may argue, may require the creation of other profit-making institutions with a large market capitalisation to assist the economy and provide support to the government," observed Gaurav Mistry, associate partner at New Delhi headquartered law firm DSK Legal.

"The disinvestment in LIC may attract foreign investors into entering the Indian markets and investing into an institution whose success story has been well established. This should - assuming the government permits considerable funding from foreign investors for the IPO - attract inflow of foreign funds into the market while maintaining adequate liquidity in the Indian markets to ensure a certain level of stability," he added.

Also Read: LIC IPO: Here's how you can link your Aadhaar with LIC policy

To date, the Department of Investment and Public Asset Management (DIPAM) has only managed to raise Rs 12,029.9 crore through disinvestment receipts. Together with the oil and gas major Bharat Petroleum Corporation Ltd (BPCL) and logistics player Container Corporation of India (CONCOR), LIC is an important disinvestment target for the current fiscal. Although the government has not met with much success on the first two, listing of LIC will help boost its long-term privatisation plans.

Meeting disinvestment target

In January, the government successfully executed the highly complicated privatisation of a company like Air India that had been hanging fire for over two decades. LIC is expected to be yet another milestone on that road.

"A successful completion of LIC's listing process will help meet the divestment target, given the fact that the IPO is pegged at anywhere from Rs 53,500 to Rs 93,625 crore. If the government can conclude it within this fiscal, then it shall be able to largely achieve its revised target of Rs 78,000 crore from its earlier target of Rs 1.25 lakh crore," observed Mehta.

Participation by foreign institutional investors (FIIs) holds the key to LIC's successful listing. The company is the largest asset manager in the country, with assets estimated at Rs 39.55 lakh crore. This is marginally higher than the AUM of India's entire mutual fund industry.

"Global mutual and pension funds will find this an attractive proposition. Such endowment funds are also looking at good returns in the backdrop of high inflation of up to 7 per cent in advanced economies like the US. Therefore, the LIC IPO is a kind of investment that may yield them returns in the range of 12-15 per cent," averred Choksey.

According to analysts like Choksey, this alone may lead global funds to invest anywhere between $2-3 billion in the IPO.

Meanwhile, the number of inquiries to Pawar has only increased since Sunday evening. "The average investor is seeing LIC as a good investment. Everyone is now eagerly waiting for the announcement of the opening date," she disclosed.

Also Read: LIC made big money in these stocks in FY22; do you own any?