LIC IPO: Mega initial public offering of LIC not likely in current financial year

The mega initial public offering (IPO) of insurance behemoth Life Insurance Corporation (LIC) won’t materialise in the current financial year owing to tardy progress in preparations and paucity of time to complete the formalities, sources aware of the matter told FE.

Selling a 10% stake in LIC is crucial for the revenue-hungry government to meet the FY21 disinvestment target of Rs 2.1 lakh crore. Without the LIC IPO, the disinvestment receipts could at best be around Rs 1 lakh crore, even assuming even the much-delayed BPCL stake sale will be completed by March 31.

A Cabinet proposal has been floated by the department of financial services recently to amend the LIC Act to make it compatible with the Companies Act and proposing in-principle approval to dilute up to 25% equity in the demutualised LIC in tranches. As per the note, the IPO size is to be in the range of 5-10%, depending on the market appetite at the time of the offer.

“However, it is not feasible to float the IPO in the next six months as a lot of preparatory work is pending,” a senior official told FE.

Usually, the IPO preparation and processes take 6 to 9 months before the offer hits the market. Besides the pandemic, in this case, the LIC Act, 1956, needs to be amended to transition it from mutual structure (where policyholders are de-facto owner) to a corporate body (where shareholders are owners with authorised and subscribed capital structure) as per the Companies Act.

Currently, LIC pays 95% of its surplus to policyholders and 5% to the government (Section 28 of LIC Act), that has to change as profits need to be shared with all shareholders when it becomes a joint stock company. Similarly, the books of accounts have to be prepared in compliance with the Companies Act.

As far as amending the LIC Act is concerned, a Bill may be tabled in Parliament in December, the earliest such opportunity available as the House is currently adjourned sine die.

While the exact valuation of the insurer –- which often plays White Knight to the government, is not available, it is believed to be worth Rs 8-11.5 lakh crore, meaning a 10% IPO could fetch the government Rs 80,000-1,10,000 crore. Private valuation firm RBSA Advisors recently estimated LIC’s worth to be in the range of Rs 9.9-11.5 lakh crore. The Centre had estimated receipt of Rs 90,000 crore from the IPO of LIC and full or partial sale of residual (47.1%) stake in IDBI Bank in BEFY21, the bulk of this was expected from LIC listing.

LIC has a lion’s share in India’s insurance business with close to 70% first-year life insurance premia fetched by it, thanks partly to the comfort of sovereign guarantee.

In a recent commentary, S&P said it considered the proposed float of shares of LIC to be crucial for the government to consolidate its fiscal position following the spike in the deficit this year.

While the government has taken into account lower realisation from the sell-off exercise in FY21, “we would keep up the pressure” on the disinvestment department to realise the budgeted target, economic affairs secretary Tarun Bajaj said last week, announcing no change in the enhanced borrowing plan for this fiscal.

With net tax revenues declining 30% on year in April-August (the budgeted growth was 21% in FY21 over the actual of FY20), some analysts see fiscal deficit even doubling from the budgeted target of Rs 8 lakh crore.

So far this fiscal, the Centre has garnered around Rs 17,000 crore or 8% of the FY21 disinvestment target. The Centre is now banking on the sale of its entire 52.98% stake in BPCL along with a clutch of other transactions to minimise the shortfall in its non-debt capital receipts from the budgeted level in the current fiscal. The government was earlier expecting Rs 70,000-80,000 crore from the BPCL sale. However, the BPCL stock declined 34% between October 3, 2019 (Rs 531.9) and October 1, 2020 (Rs 353.25). The last date to submit expressions of interest for BPCL has been extended a fourth time to November 16, making it a race against time to complete the deal by the end of FY21.