The Centre’s decision to go ahead with the Initial Public Offer (IPO) of Life Insurance Corporation of India without waiting for ideal market conditions is pragmatic. The offer was put off in March as the Russia-Ukraine conflict cropped up to roil global markets and send Indian stocks into correction mode. Though the conflict has since continued and Foreign Portfolio Investors (FPIs) have been in pull-out mode, the Indian market has proved fairly resilient to the upheavals, with domestic investors cushioning its fall to less than 10 per cent. The medium-term outlook for equities remains choppy with continued geopolitical tensions, US Fed rate hikes and inflationary pressures, so there would have been no point in the government putting off this marquee IPO indefinitely while waiting for sanguine market conditions to re-emerge.
By paring down the equity stake proposed to be disinvested from 5 per cent to 3.5 per cent and settling for disinvestment proceeds of ₹21,000 crore instead of ₹50,000-₹70,000 crore expected earlier, the government is signalling that it does not view the LIC disinvestment as a mere fund-raising exercise. The listing of India’s largest State-owned insurer opens up its operations and financials to public scrutiny, making the IPO an important step forward in India’s financial reforms. With over ₹40 lakh crore assets and 29 crore policyholders, LIC is India’s largest domestic institution and has a larger retail footprint than the entire mutual fund industry. With its operations governed by the LIC Act without independent Board oversight, LIC was often criticised for making less-than-transparent investment decisions at its promoter’s behest. The governance reforms initiated preparatory to this IPO to transform LIC into a Board-managed corporate entity, bifurcate its shareholder and policyholder funds and lay down a clear surplus distribution policy, could benefit both policyholders and markets at large, by ensuring more transparent and commercially-driven decisions. Listing will also open up new market-based funding sources for LIC to bankroll growth and maintain a healthy solvency ratio without relying on the exchequer.
Though doubts have been raised as to whether the Indian market has the capacity to absorb a ₹21,000 crore offer, serious long-term investors whether they are retail, domestic institutions or foreign funds will find the LIC offer hard to ignore. With a ₹6 lakh crore market cap and a 66 per cent market share, LIC remains a dominant force in India’s under-penetrated life insurance market. Concerns that LIC due to its size cannot match the growth rates of smaller private players, seem to have been addressed in the government setting the offer’s valuation at 1.1 times embedded value, when private players trade at 2-4 times. The 10 per cent policyholder reservation and discounts for policyholders and retail investors, aim to translate the enormous goodwill that LIC enjoys among Indian households into IPO subscriptions. Having set a low bar on expectations though, the government needs to ensure that LIC delivers on financial performance and shareholder returns post-listing, so that long-term investors who put faith on the IPO in these turbulent times aren’t disappointed.