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The government may not initially sell a 10% stake in Life Insurance Corp. of India (LIC) through an initial public offering (IPO), choosing instead to sell 5-6%, followed by a similar second public offering, given the mammoth size of the state-run insurer, four people aware of the development said.

Although the valuation exercise of LIC is yet to be concluded, its estimated value is likely to be around 12-15 trillion. A 10% stake sale would mean the size of the offering would be around 1.2 trillion to 1.5 trillion. The government fears that a sale of that size would crowd out private companies from the equity market, hampering economic growth, the people said, requesting anonymity.

The overwhelming response to food delivery startup Zomato’s 9,375 crore IPO has shown that public market investors can absorb large share sales. The IPO was subscribed about 40 times. With stocks reporting record gains in the past year, many firms are preparing to go public. The government would like to strike a balance between achieving its disinvestment target and giving space to private firms in the equity market, the people said.

Budget 2021-22 has set a disinvestment target of 1.75 trillion. Out of this, as much as 1 trillion could be raised by selling government stakes in state-run banks and financial institutions, including LIC. The balance of 75,000 crore could be mopped up through disinvestment of government’s shares in public sector firms such as Bharat Petroleum Corp. Ltd, Air India and Shipping Corp. of India, one of the four said.

The LIC IPO is crucial to meeting the disinvestment target for FY22. So far, disinvestment proceeds have amounted to a paltry 7,645.70 crore.

“A final call on the size of the LIC IPO has not been taken as yet. Meeting the disinvestment target is not the sole consideration for the government. It will also consider the impact of the IPO on the economy as a whole before finalizing its size," a second official said, adding that the public offer is expected to hit the market by the end of the third quarter or the fourth quarter of the financial year.

Minister of state for finance Bhagwat Kishanrao Karad on 19 July told Parliament that the IPO is “planned to be completed" in the current fiscal. “Several disinvestment transactions are expected to be completed during the year," Karad said.

“It would be prudent for the government to offload its stake in LIC gradually. It can command a significant premium in the follow-on public offer next year. It can continue to dilute its stake in small proportions in the next five years to meet the regulatory requirement and command premium every time," the third person cited above said.

According to the new listing norms of the Securities and Exchange Board of India (Sebi), companies with a size of over 1 trillion would be required to achieve at least 10% public shareholding in two years and at least 25% within five years from the date of listing.

A person at a Mumbai-based investment bank said, “Sebi’s new norms released in February will be in favour of LIC IPO as it allows the issuer to gradually dilute stake without hampering sanity in the market. We expect the demand for LIC paper to be so huge that it will be absorbed easily by the huge interest shown by institutional players. However, concerns of liquidity squeeze post-IPO may see the government taking a conscious decision to opt for smaller dilution of stake." The person requested anonymity because of the bank’s potential association in the IPO.

Nilaya Varma, co-founder and CEO of consulting firm Primus Partners, said the government will take a prudent and pragmatic approach. “Given the expected supply in terms of new IPOs and size of divestment, we believe the cautious approach followed by the government will help in maximizing value for LIC."

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