LIC’s may be the mother of all IPOs in India

In what might be one of India’s biggest initial public offerings (IPO), the government will offer a part of its stake in Life Insurance Corp. of India (LIC). However, before anything, the LIC Act will have to be amended and the corporation’s capital structure has to be changed.

According to Mint’s calculations, based on what finance secretary Rajiv Kumar said on Saturday, the government is expecting over ₹70,000 crore from the sale of an undisclosed stake in LIC.

“Listing of companies on stock exchanges (instills) discipline (into) a company and provides access to financial markets and unlocks its value. It also gives opportunity for retail investors to participate in the wealth so created,” the FM said.

LIC had a market share of 76.28% in terms of number of policies sold, and 71% of first-year premium as on 30 November 2019. Its net premium income for FY19 stood at ₹3.37 trillion, while net income from investments stood at ₹2.22 trillion.

The total value of its equity investments in FY19 was ₹28.32 trillion (94.9% of its total investments), with another ₹1.17 trillion and ₹34,849.37 crore in loans and money market investments, respectively. Industry experts believe the stake sale will not only allow the government to meet its revised fiscal deficit target, but also draw more foreign investments into India.

She pegged the total divestment target for FY21 at ₹2.1 trillion, up from the revised target of ₹65,000 crore for FY20. Apart from LIC, others headed for a sale include Bharat Petroleum Corp. Ltd (BPCL) and Air India. Apart from that, the Centre will also sell its remaining 47.11% stake in IDBI Bank. The finance secretary indicated that ₹90,000 crore will come from the sale of IDBI Bank and LIC stakes. Since the current value of the government’s 47.11% stake in IDBI bank is ₹16,576 crore (at Friday’s BSE closing), LIC could be valued at ₹73,423 crore.

“Target specified by honourable finance minister will come from listing of LIC and IDBI at this stage,” Kumar was quoted as saying by Bloomberg.

Experts believe the stake sale will not only allow the government to meet its revised fiscal deficit target, but also draw more foreign investments into India.

“My guess is that LIC is potentially India’s highest market cap company, but obviously that job has to be left to investors. When such large companies get listed, your weight in MSCI Emerging Market index goes up and it helps you attract passive index ETF (exchange-traded fund) money, and active investor money. So, we will receive more foreign portfolio courtesy this step,” said Nilesh Shah, managing director, Kotak Mahindra Asset Management Co. Ltd.

According to Shah, LIC’s listing will also lead to more transparency owing to disclosure norms for listed companies, compared to unlisted ones. Moreover, by bringing in such a large company into the listed space, India could bring many more investors into the stock market, he added.

The budget also emphasized the need for India’s financial sector to tap the capital markets, nudging state-owned banks to look beyond the government for capital infusion.

“We had earlier approved consolidation of 10 banks into four. In the last few years, government of India has infused about ₹3.5 trillion by way of capital into public sector banks (PSBs) for regulatory and growth purposes,” said Nirmala Sitharaman, adding that governance reforms will be carried out for these banks to make them more competitive.

In FY19, the Centre had infused over ₹1 trillion in PSBs with the last round of ₹48,239 crore coming in February, allowing six banks to exit the Reserve Bank of India’s (RBI) prompt corrective action framework.

In not announcing a capital infusion plan for PSBs, the government seems to have deferred the RBI’s advice. In its Report on Trend and Progress of Banking in India, the central bank had said last month that the government’s infusion of capital in some PSBs was just enough to meet the regulatory minimum, including capital conservation buffer. In the coming years, it said, the financial health of PSBs should be assessed by their ability to access the capital markets instead of depending on the government.

The government will sell its remaining holding in IDBI Bank to private, retail and institutional investors, the finance minister said.

In January, LIC had completed acquisition of a a 51% stake in IDBI Bank. Reacting to the minister’s announcement, shares of IDBI Bank rose as much as 17.5% intraday, and closed at ₹37.3 on Saturday, up 10% from its previous close.

In another development, the FM said the cap on foreign portfolio investments (FPI) in corporate bonds will be increased to 15% of the outstanding stock of corporate bonds from the existing 9%.