The big bet: LIC files IPO papers with Sebi, govt to offload 5% stake

The government will sell 5 per cent of its stake in Life Insurance Corporation (LIC), through an initial public offering (IPO), of which 100 per cent is offer for sale. LIC filed its draft red herring prospectus (DRHP) with the market regulator Securities and Exchange Board of India (Sebi) on Sunday, thus setting the wheels in motion for the country’s largest-ever IPO.

The market regulator, according to sources, is expected to give its nod for the LIC IPO in three weeks. The Union government has often reiterated that the public issue of LIC will happen within the current financial year (FY22).

According to them, this maiden share sale should fetch the government between Rs 60,000 crore and Rs 75,000 crore, which could peg the insurer’s market value between Rs 12 trillion and Rs 15 trillion. The final valuation will be decided closer to the IPO.

In the DRHP filed with the market’s regulator Sebi, LIC has said that the government will offload 316.25 million shares of its over 6,325 million shares. The government owns 100 percent of LIC.

But the DRHP has not revealed the issue size of the IPO. Actuarial firm Milliman Advisors LLP has estimated LIC’s embedded value at Rs 5.39 trillion as of September 30, 2021. The embedded value is a measure used to estimate the consolidated value of shareholders’ interest in an insurer.

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“The IPO is 100 per cent OFS (offer for sale) by the Government of India and no fresh issue of shares by LIC. For filing valuation about 316 million shares are on offer, representing 5 per cent equity. LIC has a 66 per cent market share in new business premia with 283 million policies and 1.35 million agents as of March 31, 2021. The embedded value of LIC as of September 30, 2021, is Rs 5,39,686 crore (about Rs 5.4 trillion)” Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey said in a Twitter post.

Since the offer is an OFS, LIC will not receive any proceeds from the public issue. The proceeds from the public issue of LIC are crucial for the government to meet its disinvestment target. The government has lowered its FY22 disinvestment target to Rs 78,000 crore from the initial projection of Rs 1.75 trillion. The Centre has, so far, mopped up about Rs 12,000 crore through disinvestment.

According to the DRHP, the employee reservation portion shall not exceed 5 per cent of the post-offer equity share capital. And, the policyholder reservation portion shall not exceed 10 per cent of the offer size.

Largest IPO ever

LIC’s IPO will be India’s largest-ever share sale, surpassing the issue by digital payments firm Paytm (One97 Communications), which raised Rs 18,300 crore in November last year.

The mega offering is coming at a time when foreign portfolio investors (FPIs) have hit an exit button. They have pulled out over $6 billion from domestic stocks, so far, this year. The IPO will test the appetite and depth of the domestic market. Paytm’s entry into the secondary market bombed with shares crashing more than 50 per cent.

The LIC share sale is being handled by 10 investment banks: Kotak Mahindra Capital Company, Axis Capital, BofA Securities India, JM Financial, Goldman Sachs (India) Securities, ICICI Securities, Citigroup Global Markets India, JP Morgan India, Nomura Financial Advisory and Securities (India) and SBI Capital Markets.

The insurer has earned a net premium of Rs 1.87 trillion in the first six months of FY22. It has earned interest, dividends, and rent to the tune of Rs 1.24 trillion in the same period. Also, it mopped up Rs 23,246 crore from sale or redemption of investments.

The insurer earned a net profit of Rs 1,504 crore in the first six months of FY22. In FY21, the state-owned insurance giant had reported a net profit of Rs 2,906.77 crore, and in FY20, the profit was to the tune of Rs 2,712.7 crore.

The insurer brought its gross non-performing asset (gross NPA) ratio in the debt portfolio down to 6.57 per cent at the end of the September quarter (H1FY22). At the end of March 2021, gross NPA stood at 7.78 per cent. Net NPA at the end of H1 was 0.05 per cent. This is the same as during the end of FY21.

Losing market share

While LIC continues to be the largest player in the life insurance market, it is losing market share to private players because the latter have a diversified product mix and strong distribution through bancassurance partners. As of January 2022, LIC’s market share in new business premia (NBP) stood at 61.16 per cent (according to the Irdai data) compared to 66.18 per cent in April 2021, thereby losing almost 500 basis points of market share to private life insurers, since the beginning of the financial year.

LIC had 286 million in-force policies under individual business (within India) as of March 31, 2021. Further, as of September 30, 2021, it had a market share of 64.49 per cent in NBP (individual and group); the next largest competitor had a market share of 7.79 per cent in NBP (individual and group).

As of September 30, 2021, LIC operates through eight zonal offices, 113 divisional offices, and more than 4,700 branch/satellite and mini offices. LIC has traditionally been an agency-driven institution, with 1.33 million individual agents as of January 2022 — more than 55 per cent of the total individual agents the life insurance industry has. But lately, it has been wanting to diversify its distribution channels.

As of September 2021, LIC’s assets under management were Rs 39.6 trillion. LIC’s AUM are more than 3.3 times higher than the total AUM of all private life insurers in India; they are approximately 16.2 times more than the AUM of the second-largest player in the Indian life insurance industry SBI Life (AUM of approximately Rs 2.4 trillion). The figure is also 1.1 times the AUM of the entire mutual fund industry in India — Rs 36.7 trillion as of September 30, 2021.