Life Insurance Corporation of India (LIC), the country’s largest insurer is getting ready to be listed on the stock exchanges as announced in Budget 2020. However, the initial public offering (IPO) via a government divestment is expected to be a lengthy process involving the evaluation of thousands of LIC documents since its inception in 1956.
Finance minister Nirmala Sitharaman in her Budget 2020 speech had announced that the government will divest its stake in LIC through an IPO. Later, finance ministry officials added that the IPO will be brought out in the second half of FY21.
Ahead of the IPO, here's a lowdown on how the entire process will pan out:
Parliamentary nod and LIC Act changes
Once the Finance Bill gets a Parliamentary nod, the proposal related to divestment in LIC will be brought up for voting. After the Finance Bill is passed, the government will have to bring in legislative changes to the LIC Act, 1956.
Given the timeline that the government has planned, the amendment will have to be brought in in the Budget session itself, or latest the Monsoon session of Parliament.
Amendments specifically related to LIC Act include the sections related to the sovereign guarantee provided to policyholders, dividends payable to the government as well classification of the entity. Since LIC is termed as a ‘corporation’, changes will have to be made to change its classification to ‘company’.
Getting IRDAI approval
While LIC is governed by its own regulations, being a part of the insurance sector means that it would need a regulatory nod. The sector regulator Insurance Regulatory and Development Authority of India (IRDAI) would need to give an approval twice, once before the process begins and once LIC is closer to the IPO.
IRDAI will also study LIC's financials and consider the necessity and feasibility of its IPO. However, since LIC is a government entity, no major objection is expected.
Appointment of bankers
Once the legal and regulatory clearances are received, LIC will appoint a banker who will be the book running lead manager (BRLM) for the IPO. The BRLM will be responsible for the due diligence of LIC and will also handle the most important aspect of the IPO, which is valuation.
While conservative estimates put LIC’s value at Rs 10 lakh crore, the bankers (BRLM and others) will have to do a complete re-evaluation of the books and its business. Considering that it will be a mega-listing, LIC may appoint at least five bankers for this process.
LIC has been in business since 1956. Its balance sheet size exceeds Rs 31 lakh crore. Its total investments in debt and equity exceed Rs 25 lakh crore. The task for the bankers would be to scrutinise all the minute details of these investments while arriving at a valuation. Further, the real estate assets of LIC will also be part of the valuation process.
Another task is that LIC reports businesses separately including non-linked, linked and pension. Each segment also has separate investment accounts and provisions for doubtful debts. These books will have to be individually scrutinised and any cleanup, if required, has to be done to ensure compliance.
Filing draft papers with SEBI
Once the draft red herring prospectus is filed with the Securities and Exchange Board of India (Sebi), the markets regulator will do a detailed analysis of the offer and the fundamentals of LIC.
Any queries or clarifications sought by Sebi will be sent to LIC subsequently. Once this query resolution process is complete, Sebi gives its go-ahead for the IPO. A separate filing also needs to be done with the Registrar of Companies prior to the IPO.
Investor roadshows by LIC will help them gauge the public perception and demand for the upcoming IPO. This is likely to be done a few months before the IPO.
Considering that this could be one of the largest IPOs in the Indian market, LIC is expected to conduct roadshows in both India and South-East Asian markets apart from select locations in Europe and the US. This will also help attract large foreign institutional investors to put money in the IPO.
Pricing and allocation
The last leg of the LIC IPO process will be book building and the pricing of the IPO. The pricing process is crucial because the demand will be based on how the offer is priced.
It is likely that a part of the IPO will be reserved for LIC staff members as well. However, considering that LIC has more than 1,00,000 employees it is not clear whether only those above a certain grade will be eligible to subscribe.
Once the final documents for the IPO are filed with RoC and SEBI, the listing date is announced. The IPO bids will be open for 3-4 days during which both individuals, employees as well as institutions can participate.
While LIC chairman M R Kumar has stated that the H2FY20 IPO timeline is possible, in reality, it looks like a mammoth task. Considering the depth of LIC’s insurance and investment books, a basic cleanup could take a few months. Whether LIC keeps its FY21 IPO date will be keenly watched by the market.