Centre may line up two dozen anchor investors for mega IPO
Anchor investors are QIBs who agree to buy shares at a particular price by applying to invest at least ₹10 cr in the IPO before it opens
The government plans to bring in a clutch of anchor investors to invest up to ₹25,000 crore in the shares of Life Insurance Corp. of India (LIC) in its planned mega initial public offering (IPO), said two people, including a top central government official.
The country’s largest insurer will also undergo a change in its board structure and adopt new accounting norms before the IPO, the two said on condition of anonymity.
“We will invite anchor investors after the embedded valuation exercise is done and the pricing for the IPO is ready," the government official said.
“There may be more than two dozen anchor investors in LIC’s IPO," the other person said.
Anchor investors are essentially brought in to enhance the confidence of investors and gauge the demand for the IPO in the market. Having anchor investors may be critical for LIC because of the size of the state-run insurer and the changes being adopted by it, which may make IPO investors concerned about the ability of the insurer to sustain its growth under the restructured avatar of LIC. A mere 10% stake in the company is estimated to be worth at least ₹1 trillion, which is unconventionally high for the Indian equity market.
“Anchor investors will buy LIC’s shares to help measure market demand. They will buy a portion of the shares meant for qualified institutional buyers (QIBs). If anchor investors pay a certain amount and the market is ready to pay more than that on the day of IPO, the anchor investors will have to bring in the extra amount to match the market price. If the market shows a demand of less, we don’t have to refund the extra amount to anchor investors. This is the benefit of having anchor investors," the official said.
Anchor investors are QIBs who agree to buy the company’s shares at a particular price by applying to invest at least ₹10 crore in the IPO before it opens, according to the listing norms of the Securities and Exchange Board of India (Sebi). As much as 50% of the shares of an IPO can be offered to QIBs. Of this, up to 60% can be allocated to anchor investors. One-third of this is reserved for mutual funds.
Allocation to anchor investors is done on a discretionary basis for IPOs above ₹250 crore. There is no cap on the number of anchor investors and an additional 10 such investors are allowed for every additional ₹250 crore worth of issue size, in which ₹5 crore is minimum allotment required for each such investor.
There is a lock-in of 30 days on shares for every anchor investor, according to Sebi.
Meanwhile, the compliance processes at LIC are being aligned with listing norms, the two persons said. “There will be changes at the constitutional level at LIC. Though we term LIC’s board as a board, there is no prescribed board at LIC as defined under Sebi’s listing norms. So, apart from the ongoing actuarial valuation exercise underway at LIC, several other changes will be done at LIC. We are regularly meeting LIC to speed up the IPO process," the government official said.
The draft red herring prospectus for LIC’s listing will be filed in six months, the official said.
“Once their annual financials are ready, it will aid the process of valuation. We will come out very soon with the RFP for appointing merchant bankers, advisors, and the registrar for the IPO," the government official said.
LIC’s IPO is a crucial divestment for the government to get non-tax revenue, narrow the country’s fiscal deficit and compensate for budgetary expenses outlined by the exchequer.
The insurer’s board will have a new structure to make it eligible for listing, the two persons said. At present, LIC’s board comprises its chairman, four managing directors, representatives of the insurer and the government.
“Also, LIC needs to change its financial reporting structure by consolidating the financials of its various businesses. LIC has a mutual fund company, a pension fund company, and overseas businesses. When an entity goes for an IPO, disclosing consolidated annual results is mandatory. So, LIC needs to consolidate its financials. That’s a new process underway at LIC," the government official said.
The exact size of the IPO is not yet ascertained.
The amount of dilution in the IPO can be worked out only after the embedded valuation report of LIC is ready, the government official said. “The current estimations are based on LIC’s assets under management and comparing it to the assets of LIC’s listed peers such as HDFC Life and ICICI Prudential Life Insurance," the other person said.
LIC’s IPO is taking longer than usual because the insurer has not been doing its embedded value calculation on a regular basis. In contrast, private insurers such as Bajaj Allianz, ICICI Prudential, and HDFC Life have been regularly doing this embedded valuation exercise even before their listing.
“This embedded valuation is critical more so because LIC’s IPO is going to be the biggest ever public issue. However, despite the size of the IPO and other private companies aiming to go public, we are confident that the LIC IPO will sail through because the brand value of LIC is immense," the official said.
Both the government and Sebi have been attempting to make rules favourable for LIC’s IPO. On 1 February, in the finance bill presented by Union finance minister Nirmala Sitharaman, the government said the Centre will hold at least 75% in LIC for the first five years post the IPO and subsequently hold at least 51% in the insurer at all times after five years of the proposed IPO.
After the Union budget was presented, Sebi streamlined public issue norms and said that the IPO size is required to be ₹10,000 crore plus 5% of the incremental market capitalization amount beyond ₹1 trillion for very large companies. Companies with a size of more than ₹1 trillion will be required to achieve at least 10% public shareholding in two years and at least 25% within five years from the date of listing, the market regulator said.
The government is implementing the amended LIC Act and bringing the rules for LIC under the Companies Act.
LIC, in which the government holds a 95% stake, is the largest insurer in the country with assets worth more than ₹34 trillion. The insurer recorded new business premium of ₹1.84 trillion for fiscal 2021, which is almost double the total premium collected by all private insurers together (in the same period). LIC commands a market share of 67% in the life insurance space.
A public listing of LIC has been delayed also because it required amendment of several sections of the LIC Act in terms of the way the corporation handles its corpus, distributes dividends, and provides government guarantee on all its policies. At present, LIC pays 5% of the surplus to the government, while the remaining 95% goes to its policyholders. In comparison, private insurance firms pay 10% of surplus to shareholders and the rest goes to policyholders.
Emails sent to LIC and the finance ministry did not elicit any response.
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