Home FINANCE Why LIC’s big share sale is a big deal

Why LIC’s big share sale is a big deal

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NEW DELHI: Till the early nineties, buying an LIC policy was usually the first thing one did after bagging a job. Years passed, the insurance business was opened to private players by 2000, but ‘LIC’ continues to be used as a synonym for life insurance even today. Now, as the clock ticks for the government to offload up to 10% stake in the country’s biggest insurer, one could be forgiven for indulging in some nostalgia. Finance Minister Nirmala Sitharaman has said that the government proposes to bring an Initial Public Offer (IPO) for LIC by March 2022. There are indications that the draft prospectus for this IPO may be filed with stock market regulator SEBI later this month.
India’s biggest insurer
Since it was established, LIC has grown by leaps and bounds. By September 2021, the initial capital of Rs five crore had become an asset base of over Rs 38 lakh crore. And as per a survey report of Brand Finance Insurance 100, the LIC brand is the third strongest and 10th most valuable brand in the world. Also, nearly two decades after the insurance sector was opened up to private players, LIC has 66.18% share in ‘First Year Premium’ income and 74.58% in number of policies. In 2020-21, it sold 2.1 crore new policies or well over 57 lakh new policies, on an average, daily. It employs more than a lakh Indians and over 13 lakh commission agents.
LIC, the insurer
Value of sold policies

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LIC has been a traditional, middle class safe haven; the salaried still park some of their hard-earned money in buying insurance from the ubiquitous LIC agent. With so much of the middle-class sentiment invested in it, is it any wonder that the government’s move to divest minority stake in LIC has generated a furious debate?
A big investor too
Pranav Haldea, MD of Prime Database Group, says “By virtue of its size and AuM (assets under management), LIC is the single most dominant player in the Indian equity market. LIC has also been called upon several times to rescue divestment deals and follow-on offerings from public sector enterprises and banks and also to counter FPI selling and lend stability to the market. LIC has traditionally been a contrarian investor in the market and has invested when market sentiment has not been that great.”
LIC, the investor

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The total investments of LIC (or AUM) as of March this year were Rs 36.71 lakh crore versus net AMU of over Rs 31.42 lakh crore for the entire mutual fund industry. And even though its holding in companies listed on NSE slipped to an all-time low of 3.66 per cent by March (3.7 per cent in December 2020, much higher 5% in June 2012), the value of its holdings increased by 6.3 per cent quarter on quarter to Rs 7.24 lakh crore. LIC was booking a profit by offloading some of its shares on NSE during the March quarter.
In ownership by number of shares (average of LIC holding as a % of total share capital across all NSE listed companies), LIC owned just under a percent (0.85 per cent) NSE shares in March. It continues to command a lion’s share of investments in equities by insurance companies (76 per cent). LIC’s holding in some of India’s blue chips: in RIL it was Rs 74,437 crore or over 5%; in TCS, LIC held shares worth Rs 45,724 crore or nearly 4%. In Infosys its holding was worth Rs 34,187 crore, in State Bank of India it was worth nearly Rs 30,000 crore, in HDFC Bank nearly Rs 23,000 crore and in Hindustan Unilever it was worth close to Rs 20,000 crore. In terms of percentage stake, LIC held the highest 49% stake in IDBI Bank. nearly 14% of L&T and close to 12% of Oil India Ltd. LIC invested an additional Rs 3501 crore in TCS in the March quarter of 2021-22 and its investment in Bajaj Auto increased by nearly Rs 7000 crore in these three months.
How big will the IPO be? There is no official word on the valuation of LIC yet. But market capitalisation is expected between Rs 9 lakh crore to Rs 11 lakh crore, lower than RIL or TCS but higher than standalone HDFC, says Deven Choksey of wealth management company K R Choksey Holdings. “The age of an insurance company is directly proportional to its profit-making potential and therefore LIC is expected to be profitable for the investor,” he adds. Another brokerage says that while deciding the IPO pricing, the listings of New India Assurance and GIC may weigh on the government’s mind. Aggressive pricing during the IPO for both these insurers in 2017 led to losses for investors and the stock prices continue to be at a deep discount to their IPO price even today.
Who’s interested: The IPO may be of interest to retail investors as LIC has a strong balance sheet and the insurance business has significant growth potential, given dismal overall penetration.. Also, LIC’s nearly 30 crore policy holders and some employees may be game, since it plans to reserve a portion of the issue for both categories. This means policy holders and employees may get LIC shares at a discount. Also, policy holders may benefit from greater transparency post listing about where all their money is invested. The government has already clarified that sovereign guarantee on policy holders’ money will continue.
Voices against public issue: LIC’s employee federations have been representing against stake sale, citing several reasons. In a letter to Sitharaman last year, they had said that growth in the number of policyholders and claim settlements had been achieved “entirely through generating internal resources. The government did not make any additional contribution to the initial capital of Rs 5 crore made in 1956, which was enhanced to 100 crore in 2011 due to regulatory issues. On this meager capital base, LIC today is managing assets in excess of Rs.32 lakh crore.” P Satish, Zonal President of All Indian Insurance Employees Association says only 5% of LIC’s annual surplus is currently given to the government, 95% goes back to policyholders as bonus. “This math will change as the number of shareholders will go up after the listing. And when the IPO comes, global experience shows profit motive could push LIC to more and more investments through risky instruments.”
The LIC Story: The insurer was established in 1956, when 245 Indian and foreign insurers and provident societies were taken over by the central government and nationalized. It was formed through the LIC Act, 1956 with capital contribution of just Rs 5 crore from the government and remained a monopoly till 2000, when private insurers were allowed in. Besides domestic operations, it has three branches outside India – in UK, Fiji and Mauritius. It also has a wholly owned subsidiary in Singapore and joint venture operations in Bahrain, Kenya, Sri Lanka, Nepal, Saudi Arabia and Bangladesh. In India, LICI’s subsidiaries include LIC Pension Fund Lt and LIC Cards Services Ltd. Its associates include IDBI Bank Ltd, LIC Mutual Fund. and LIC Housing Finance Limited.
LIC for government: LIC has often been a knight in shining armour for the government, investing large sums of money in public sector entities and infrastructure projects. In the past, LIC has rescued IDBI Bank from collapse by pumping in money; one of India’s largest non-banking finance companies, IL&FS, has also been similarly rescued by this state insurer through timely infusion of a large tranche of funds. As per RBI data, LIC’s investments in public sector companies have been surging year on year and this amount has more than doubled between 2015 and 2021. The figure was nearly Rs 27.7 lakh crore by March 2021, up from nearly Rs 25 lakh crore in March 2020 and just about Rs 13.7 lakh crore in 2015.
Even the proposed IPO will help the government meet its disinvestment receipts target for 2021-22. To get the IPO going, amendments to the Life Insurance Corporation Act of 1956 have already been made. The amended Act provides for dilution of the government’s stake and states that the dilution cannot be beyond 25% in the next five years. This means the government’s stake in LIC cannot fall below 75% for five years after the IPO. The amendment also says that the government must retain majority 51% at all times, which means the government can incrementally reduce its stake over the next few years and eventually up to 49% of LIC can be in private hands.
As the debate over whether a publicly listed LIC is more transparent and better able to protect investments of the aam aadmi than a wholly stated owned one rages, perhaps a successful listing would silence the naysayers.
Data on LIC holdings sourced from primeinfobase.com

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