LIC’s IPO in an IPO-weary market: What it means


LIC is the only public and overall the largest life insurance company in the country. It ranks as the largest IPO in the country and would have to address investor concerns after a string of unsuccessful IPOs in the recent past.

LIC is the only public and overall the largest life insurance company in the country. It ranks as the largest IPO in the country and would have to address investor concerns after a string of unsuccessful IPOs in the recent past.

The story so far: The much-anticipated initial public offering (IPO) of Life Insurance Corporation of India (LIC) starts on May 4th with a price range between Rs 902 and Rs 949 per share. Investment and Public Asset Management (DIPAM) Department Secretary Tuhin Kanta Pandey said in the announcement that the government could raise around Rs 21,000 despite limiting the size of the IPO. The government initially planned to dilute a 5% stake in LIC, which now stands trimmed to 3.5%. He said the decision was made in light of existing conditions in the overall market.

In addition, he explained that the decision to list LIC was made taking into account factors such as market demand, reduced market volatility, domestic capital flows and LIC’s performance.

The company is the only public entity and overall the largest entity in the country’s life insurance sector. Additionally, it claims to have an agent network of 1.35 million – wider than all personal life insurance players combined – as of March 31 of the previous year.

What do investors get out of it?

In 2021, several companies went public as they saw markets were positive and reaching record highs. These included companies like fintech PayTM and cosmetics retailer Nykaa. While the latter had an impressive debut – opening at a premium of around 78% over its issue price of Rs 2,001 – the former was trading at a discount of 9% at Rs 1,955. Additionally, media reports had indicated that due to the darkness in the IPO market, digital payments platform MobiKwik has also opted to delay its IPO.

Therefore, this recent experience may make investors cautious about LIC’s IPO. Alternatively, this could also be an opportunity for LIC to reverse the fear.

Chartwizard FZE and Gemstone Equity Research founder Milan Vaishnav believes that apart from the tremendous attention the issue is attracting from investors, the IPO has the potential to unlock a lot of value for Indian investors. According to him, the subscription issue is unlikely to face any headwinds. “In the rising interest rate regime, when many large investors are migrating from the markets towards safe havens, this may remain a theoretical topic for the LIC. However, in practical terms, it may not get a blockbuster response, but it is also highly unlikely that LIC will encounter any problems,” he said.

Rating agency ICRA believes that although sectoral valuations have softened recently, “the most significant uncertainty is the recent changes in their methodology for distributing investment surpluses to policyholders and shareholders and how the proposed changes in business mix will affect their valuations at listing.” stay”. Prior to initiating the IPO, LIC had split what was previously the only “Life Fund” into participatory and non-participatory funds and set further terms on how the surplus would be shared between policyholders and shareholders. With-profits contracts provide bonus payments to shareholders, which is not the case with non-profits contracts.

The rating agency believes that the separation of the “Life Fund” would help improve profitability. In the future, it would have the opportunity to focus on products that have a higher DNO, such as, in addition to activating its partnerships with the PSU banks. B. Individual and group protection products as well as non-participatory products. VNB or Value of New Business reflects the additional value created for shareholders by subscribing to new awards over a period of time.

Common good versus profitability and competition

The listing of a public sector corporation raises fears that they may change focus to solely serve investors’ demands for profitability. LIC’s community service activities are particularly evident in the significant number of applications it has processed during the COVID-19 pandemic. Claims increased by 37% year-on-year to c. Rs 23,927 crore in FY2021. According to Mr Vaishnav, LIC has the largest premium collection at more than Rs has a much lower premium collection of Rs.502 crore (approximately Rs.50,200 crore). In 2020, LIC had granted a grace period until May 31 for all premiums due in March, in accordance with the guidelines of the Insurance Regulatory and Development Authority of India (IRDAI) – which particularly impacted cash flow.

ICRA says public agencies have continued to balance their social welfare goals while rewarding shareholders. It added that increased scrutiny by minority shareholders helps improve the transparency of an institution’s decision-making. “Improved regulatory disclosure requirements at listing will bring these benefits,” it says.

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