New Delhi: The government has initiated preparations for the mega initial share sale of state-owned Life Insurance Corporation of India and would take about a year to complete the transaction as the process may involve amending several laws.
An interministerial committee will be set up comprising officials from the department of investment and public asset management (DIPAM), department of financial services and law ministry to oversee the stake sale in India’s largest insurer, finance secretary Rajiv Kumar said on Sunday.
“It will take at least a year," Kumar told reporters. “There are too many processes such as finding out the valuation, (looking at) Sebi (Securities and Exchange Board of India) regulations, changes in the LIC Act. We will start work with DIPAM on this."
Revenue mobilization through asset sales, particularly through the stake sale in LIC, is central to finance minister Nirmala Sitharaman’s plan to meet the relaxed fiscal deficit target of 3.5% for the year starting 1 April as well as the government’s spending commitments.
The government has set an aggressive ₹2.1 trillion revenue generation target through asset sales for the next fiscal. Of this, ₹90,000 crore is likely to come from the government’s stake sales in LIC and IDBI Bank, also owned by the life insurer.
The government’s track record in meeting disinvestment targets has been dismal, having achieved it only twice in the past eight years.
It is set to miss the target again this fiscal and expects to get ₹65,000 crore from disinvestments compared to the ₹1.05 trillion goal it had set initially.
In her budget speech on Saturday, Sitharaman said the LIC initial public offering will unlock value and open up an opportunity for wealth creation.
“Listing of companies on stock exchanges discipline 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," said the finance minister.
Although a decision on the quantum of stake sale in LIC has not been taken, a senior government official said on condition of anonymity that it is unlikely to be more than 10% as the market may not be able to absorb it.
Based on the government’s disinvestment target, the LIC stake sale could be valued at over ₹70,000 crore, Mint reported on Saturday. The government owns 100% in the country’s largest insurer.
“Life Insurance Corporation is likely to become the country’s biggest company by market capitalization on the day of the listing, given that it’s the largest company based on assets under management," Kajal Gandhi, an analyst at ICICI Direct, said in a note on Saturday. “At even 25-30% of its asset under management, the company can be valued at around ₹8-10 trillion. Even a 10% dilution will be difficult for the market to absorb in one go and the government may look at doing this in lots."
Meanwhile, Kumar said all banks that are not under the Reserve Bank of India’s prompt corrective action framework (PCA) are in a position to raise funds from the markets, as announced in the budget.
The banking regulator uses the PCA framework to ring-fence lenders breaching regulatory thresholds in bad loans and capital adequacy. At present, four banks are placed under the PCA framework.
In the past five years, the government has taken several steps to clean up the bad loan mess by supporting state-owned banks with capital infusion, along with introduction of a bankruptcy procedure for distressed companies. Strong balance sheets of banks will enable them to finance big projects at a time when private investment has slowed down.
“Whenever they (banks) need capital for growth, they can go to the market. They must stand on their feet," Kumar said, adding that more governance reforms—performance-linked incentives, introducing employee stock ownership plan, recruitment and training norms—will be carried out in state-run banks to make them more competitive.