The government is expected to sell around 10% stake in LIC to the public through the IPO and that would garner the government $15 billion (or Rs110,000cr). That approximately puts the puzzle of Rs210,000cr disinvestment target for 2020-21 in place. With LIC IPO accounting for more than 50% and Air India strategic sale also happening, this target surely looks achievable. Here is what you need to know about the proposed LIC IPO.
Three things to know about the LIC IPO
- When the IPO comes out, it is expected to be the largest IPO ever in India. Here is what you need to know about the LIC IPO.
- The IPO of LIC is likely to be scheduled in the second half of fiscal year 2020-21. It is going to be difficult to sell an IPO of this size unless there is substantial buy-in from global long-only funds. In addition, the government may also have to look at getting the stock including in the index right in the beginning so that passive funds and ETFs would get interested in the stock.
- LIC was formed under Statute of Parliament and there is a separate LIC Act which governs the constitution and functioning of LIC. At the time of inception, LIC was conceived as a government-owned company with an implicit sovereign guarantee. The IPO will call for an amendment to the LIC Act to facilitate the IPO and this will have to be passed in both houses of Parliament.
- Despite the presence of private insurers for nearly 20 years, LIC continues to dominate the life insurance business in India. It has a market share of 76.28% in number of policies and a 71% market share in terms of first year premiums. However, market share alone does not determine valuations as is evident from the fact that Bajaj Finance has a market cap that is greater than SBI, despite being many times smaller.
Key challenges to the LIC IPO
- LIC Unions are already up in arms against the proposed privatization and it is not going to be easy pushing the idea through the unions. Shareholder accountability also comes with diluted powers for Unions.
- There is a major concern on the sharp rise in the gross NPAs. Traditionally, LIC has maintained its gross NPAs between 1.5% and 2%. However, this year, the gross NPAs of LIC have touched a new high of 6.1%. That is likely to raise questions over the quality of their portfolio and also about the inherent value of the insurer.
- In the last few years, LIC has created positions in assets that are either locked in for the long term or are of dubious quality. LIC was compelled to take over IDBI Bank. LIC also had a significant stake in IL&FS and has been subscribing to bonds issued by various infrastructure projects. It is not too clear how many of these projects are viable and what could be the lock in.
- There is a sticky issue emanating from the fact that all LIC policies carry a sovereign guarantee. At some point, the government may have to make a provision for such off-balance sheet exposures. If the government withdraws its sovereign guarantee, it is not clear if the policies of LIC would still be sought after.
The biggest roadblock for LIC IPO will be the mindset issue. Investors were disappointed at the way the cash reserves of ONGC were depleted over time through large payouts and also by using its reserves to buying out government stakes; as in the case of HPCL. The government has long depended on LIC not only for supporting equity markets on a rainy day but also to fund many of its projects. After the ONGC experience, this could be the big concern for investors ahead of the LIC IPO.