Govt may lower LIC valuation to lure more investors

With the cut, the government wants to leave some money on the table for investors and increase the likelihood of a pop once shares start trading
With the cut, the government wants to leave some money on the table for investors and increase the likelihood of a pop once shares start trading

Summary

  • Insurer may seek 11 trillion valuation from the IPO against 16 trillion earlier
  • LIC has been ceding market share to private rivals since its monopoly ended more than two decades ago

MUMBAI : The government has decided to slash the valuation it is seeking for state-run Life Insurance Corp. of India (LIC) by about 30% to make the initial share sale attractive as Russia’s invasion of Ukraine, surging inflation and looming interest hikes make investors jittery.

LIC’s parent is now seeking around 11 trillion valuation from the IPO, a sharp discount to the 16 trillion value it initially planned to sell, two people with direct knowledge of the matter said on the condition of anonymity.

With the cut, the government wants to leave some money on the table for investors and increase the likelihood of a pop once shares start trading.

In addition, it wants to ensure that first-time investors, many of them LIC policyholders who have opened demat accounts to invest in the IPO, are not disappointed after India’s largest initial share sale.

While filing the IPO prospectus with the Securities and Exchange Board of India, or Sebi, in February, the listing valuation of LIC was originally estimated to be three times its embedded value of 5.39 trillion, in line with the average post-listing valuation of LIC’s private peers such as HDFC Life Insurance Co. Ltd, ICICI Prudential Life Insurance Co. Ltd and SBI Life Insurance Co. Ltd, one of the two people said.

Emails sent to spokespeople for the finance ministry and Department of Investment and Public Asset Management (Dipam) remained unanswered till press time. An LIC spokesperson declined to comment.

“Last week, in a meeting, Dipam and the finance ministry asked investment bankers to set the price band of LIC in a way that the market value of LIC at the cut-off price (the price at which IPO investors are allotted shares) is kept within two times of LIC’s embedded value of 5.39 trillion," said the first person.

The government is looking to divest 5-7.5% in LIC.

“The actual size of the upcoming LIC IPO is likely to be around 37,500 crore now," a third person said, also seeking anonymity.

The government’s decision to seek a modest valuation of about two times the embedded value is to ensure investors’ interest in the share sale is alive, said the two people cited initially, who were present at the meeting in which the government revised its valuation expectation.

Though LIC has been ceding market share to private rivals since its monopoly ended more than two decades ago, the government has been keen on a high valuation for LIC since the time finance minister Nirmala Sitharaman announced the plan in the 2020 Union budget.

However, the cooling down of the IPO market this year and the delay in the share sale because of geopolitical tensions have prompted the government to revisit its earlier plan.

The public offering was initially expected to be completed by the end of March.

With the equity market volatility easing slightly, the government now plans to launch the IPO either in the last week of April or in May.

If the government launches the IPO before June, it may only need to update its IPO papers by adding LIC’s December quarter earnings because the insurer’s financials up to the September quarter are already included.

“But, if the IPO is decided to be launched close to June end, the government will rather wait a little longer and launch the IPO after June so that investors get a better idea about the latest financials of LIC," said the second person.

In fact, if the IPO is launched after June, it will become compulsory for the bankers to attach LIC’s December quarter and March quarter financial results, according to Sebi rules.

“The financial results in a share sale prospectus cannot be older than six months. A lot may have changed since the September quarter. So, investors, too, should know about LIC’s latest updated financials before investing if the IPO is launched after June. In that case, a fresh valuation exercise may need to be done," the second person said.

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