PremiumThe LIC IPO has drawn significant interest from local and overseas investors, with at least 12 top fund managers committing to bring in around ₹18,000 crore as anchor investors, two people directly aware of the development said
MUMBAI/NEW DELHI : The initial public offering of state-run Life Insurance Corp. of India has drawn significant interest from local and overseas investors, with at least 12 top fund managers committing to bring in around ₹18,000 crore as anchor investors, two people directly aware of the development said.
At least five Indian asset managers, no less than three sovereign funds, two global pension fund managers and two hedge funds have agreed to be anchor investors in the LIC IPO, the people said, requesting anonymity.
The significant commitments made by marquee global investors will come as a huge relief for the government, which is launching India’s largest IPO amid geopolitical tensions, looming interest rate hikes and choppy markets. The commitments will also boost retail investors’ confidence in purchasing shares of LIC, helping the government mop up a substantial amount of funds by selling its stake in India’s largest insurer.
Anchor investors are institutional investors that agree to buy shares worth at least ₹10 crore at a pre-agreed price in an IPO before it opens for public subscription.
On Wednesday, investment bankers to the LIC IPO held a meeting to compile the list of prospective anchor investors and their committed amounts, the people said. “The list of investors who have evinced interest so far will be handed to the government on Thursday. Following this, the price discovery exercise will begin," one of the two people said.
According to the person, domestic mutual funds may invest ₹7,000-8,000 crore as anchor investors through their equity-oriented growth mutual fund schemes.
Typically, such MF schemes aim to gain from the dividends that state-run firms such as LIC dole out to shareholders regularly, which helps MF unit-holders see steady growth in their investment.
According to the people cited above, the country’s top fund houses, including HDFC Asset Management Co. Ltd, ICICI Prudential Asset Management Co. Ltd, SBI Mutual Fund, Franklin Templeton Asset Management Co. Ltd and Nippon Life Asset Management Co. Ltd have evinced interest in becoming anchor investors, after the government decided to make the public offer more lucrative by revising the listing valuation at two times the embedded value of LIC rather than the industry practice of three times the embedded value at the time of listing shares.
Together, these five fund houses manage ₹19 trillion in assets as of the March quarter, which is half of the industry’s total assets under management.
On 13 April, Mint reported that the government decided to revise the cut-off price valuation of LIC downwards to around ₹11 trillion from its initially planned valuation of around ₹16 trillion to lure more investors. The downward revision in LIC’s market valuation will mean a lower price band for investors in the IPO of LIC.
The bankers have estimated the state-run insurer’s EV at ₹5.39 trillion while filing the draft red herring prospectus with the Securities and Exchange Board of India in February.
Spokespeople for the asset management companies declined to comment since fund houses are barred from commenting on specific stocks.
Emails sent to the finance ministry, Dipam and LIC remained unanswered till press time.
Investment bankers will now initiate the price discovery process for LIC based on the government’s recent change in valuation expectations. The price band of LIC will be set for both anchor and retail investors, keeping in mind that the market value of LIC at the cut-off price (price at which IPO investors are allotted shares) is within two times LIC’s embedded value of ₹5.39 trillion.
Anchor investors are brought in essentially to enhance investor confidence and gauge demand for the IPO in the market. Having anchor investors may be critical for LIC because of the size of the state-run insurer.
If anchor investors pay a certain amount and the market is ready to pay more than that on the day of IPO, anchor investors will have to bring in the extra amount to match the market price. If the market shows demand for less, the government doesn’t have to refund the extra amount to anchor investors.
According to Sebi norms, as much as 50% of shares in an IPO can be offered to qualified institutional investors. Of this, up to 60% can be allocated to anchor investors. One-third of this is reserved for mutual funds. The government plans to sell 5-7.5% of LIC, but the size and timing of the IPO have not been finalized.
“LIC being a government-owned company will be given five years to comply with the minimum public shareholding target of 25%. The discussion is fluid in terms of the amount of stake the government will divest and the timing of the IPO in April or May," the first person said.
While the IPO has been delayed due to market volatility stemming from Russia’s invasion of Ukraine, the government wants to ensure that any further delay does not dampen investor demand. To avoid that, the government is willing to leave more money on the table for investors and has acted promptly on allowing 20% foreign investment in LIC.
On Wednesday, the government notified the foreign investment rules amended to allow foreign investors to buy up to 20% of LIC through the automatic route. “There is a huge demand from overseas pension funds due to the nature of long-gestation businesses of life insurers and the long-term nature of investments made by pension fund managers. In the absence of the 20% foreign investment limit under the automatic route, it would have been very difficult for LIC or any such company to attract foreign pension fund managers since the foreign ownership limit would have gotten fast-exhausted and getting a special approval for additional investment by foreign funds would have been time-consuming," the first person said.
However, all investors, including foreign ones, coming in as anchor investors in the LIC IPO may be subject to a lock-in period of one year.
The amendment may lead to renewed interest from foreign investors to buy LIC’s shares, which, in turn, may result in better subscription figures for the IPO.