The government is yet to appoint book running lead managers and legal advisors. An embedded value has to be decided, the insurer has to pare its stake in a number of other listed companies and has to tweak its balance sheets to comply with regulations, and the LIC Act has to be amended in Parliament.
When Finance Minister Nirmala Sitharaman was listing out divestment plans for 2020-21 in her Union Budget speech on February 1, Life Insurance Corporation of India (LIC) was the only company she mentioned by name. “The government now proposes to sell a part of its holding in LIC by way of Initial Public Offer (IPO),” Sitharaman said.
The expectation was that the LIC IPO — India’s largest — and Bharat Petroleum’s planned privatisation would be the two single biggest transactions this year, among the many that had been planned. So confident was the government of these efforts that it gave itself the highest-ever divestment target of Rs 2.1 lakh crore, of which Rs 90,000 crore was expected to come from LIC’s IPO and the government’s exit from IDBI Bank.
All these happened before the COVID-19 pandemic flatlined the Indian economy. Now with the first half of the fiscal year over, there is a clear realisation within the government and LIC there is no way India's largest insurer can make its market debut before March 31, 2021. Multiple highly placed sources in the government and the company have told Moneycontrol that realistically speaking, the IPO may not happen before the second quarter (July-September) of fiscal year 2021-22.
“A company of LIC’s size is not just a divestment, it is a policy decision on its own. Once they comply with all the regulations of listing, it is only a matter of time. But to comply with all regulations is a long, strenuous process for a company the size and complexity of LIC,” a senior government official said.
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The COVID-19 pandemic and the nationwide lockdown in April-June quarter brought economic activity to a grinding halt. The government’s direct and indirect tax collections have suffered massively, even as expenditure commitments continue to mount. In this situation, the fact that even sources of non-tax revenue and capital receipts like divestment will be nowhere close to the budgeted levels just adds to the problems being faced by policymakers in North Block.
For LIC, even picking an advisor took time. It was only in August that SBI Capital Markets and Deloitte were chosen to be the pre-IPO advisors for what could be the country’s largest IPO. That was only the first step in quite a lengthy process.
The Department of Investment and Public Asset Management is yet to appoint book running lead managers (who will also work on the public sector behemoth’s valuation) and legal advisors. An embedded value has to be decided, the insurer has to pare its stake in a number of other listed companies and has to tweak its balance sheets to comply with regulations, and the LIC Act has to be amended in Parliament.
The government plans to eventually offload 25 percent of its stake in LIC through multiple tranches.
Deciding on the embedded value
“Business revival has begun only from July. Even as the preparation for the IPO has begun, the first responsibility of the pre-advisors is to gauge the embedded value of LIC. This by itself could take 2-3 months considering the size of the balance sheet,” said a second official familiar with the matter. This official, who did not want to be named, said an optimistic target would be IPO completion by Q2FY22.
There is also a view that given the volatility in business amid COVID-19, it will also be tough to set an embedded value that could see a drastic change by March 2021.
The embedded value of LIC would have to initially be disclosed publicly. This will then determine the valuation of the insurer. Valuation is calculated as a multiple of the embedded value.
The embedded value represents the market value of the company’s assets attributable to the shareholders. It also includes the present value of the company’s future expected profits from its existing business portfolio as at the date of valuation.
To calculate the embedded value, not only is the premium collection a key factor but also the fixed assets. In LIC’s Rs 32.8 lakh crore balance sheet as of Q1FY21, fixed assets (including property) constitute Rs 2,934 crore.
Property itself runs into several thousand crores. "It includes freehold property, leasehold property as well as the multiple buildings that LIC owns. Each property/land will have to be valued separately,” the second official cited above said.
Investment book changes
That’s not all.
Insurance Regulatory and Development Authority of India (IRDAI) insists that all insurance companies are required to cap their equity stake at 15 percent in other companies.
However, LIC has exceeded 15 percent in entities like ITC where it has been a legacy investor. As of June 2020, LIC holds 16.27 percent stake in ITC, 23.69 percent stake in TCM, 20.89 percent in Standard Batteries, 17.84 percent in Modella Woollens, 17.18 percent in Cochin Malabar Estates and Industries, 16.97 percent in Simplex Realty, among others.
“In the legacy investments, LIC has exceeded 15 percent stake but it will be brought down. However, being a large institutional investor, LIC cannot be expected to immediately cut down the stake. The process will be gradual,” added a third official.
LIC also holds 51 percent in IDBI Bank for which it received special IRDAI dispensation. The insurer had already indicated earlier that it will gradually bring down its stake to the 15 percent limit.
“The Reserve Bank of India (RBI) has given us a 12-year period to bring down the stake in IDBI Bank to 15 percent. But we may not want to wait that long especially since we will also be listed. We need to look at options to unlock value,” LIC chairman MR Kumar had said earlier.
Prior to the IPO, the transaction advisors would be required to help LIC in reframing the balance sheet to meet the requirements of the Companies Act, even though LIC is governed more by the LIC Act.
As per the Companies Act, LIC will be required to disclose its investments under separate category including equity, debt, preferential shares among others. Officials estimate that changing the entire investment book would take close to 4-5 months especially since LIC has multiple investments under the linked fund, life fund and pension fund.
A larger change in the dividend/surplus playing structure of LIC would only be possible in the winter session of the Parliament since the LIC Act would have to be amended.
According to Section 28 of the LIC Act, the life insurer pays 5 percent of the surplus to the government and the rest 95 percent to its policyholders. This will change ahead of the listing since the profits have to be shared with all the shareholders.“Close to seven decades of balance sheet has to be assessed, analysed and tweaked to suit listing requirements,” said the third official quoted above.