The wheels have been set in motion for what is expected to be the largest Initial Public Offering (IPO) in India. The government has filed the draft red herring prospectus (DRHP) for the IPO of the state-owned Life Insurance Corporation of India (LIC).
As per the DRHP, the IPO consists of an offer for sale (OFS) of up to 316.25 million shares by the government of India. LIC has the largest share in India’s life insurance market at 64.1 percent in terms of premium and 66.2 percent share in terms of New Business Premiums.
The 65-year-old insurer’s divestment includes a reservation of 10 percent of the issue size for citizens who are policyholders.
In the DRHP, LIC has said that the company faces risks from the impact on business from the ongoing pandemic, interest rate fluctuations, legal proceedings against the company, related party transactions, further investments that may be required in IDBI Bank, and other external factors.
SIGNIFICANT GOVERNMENT INFLUENCE
The Government of India (GoI) holds a majority stake in LIC and will continue to be the promoter even after offloading a part of its stake in the IPO. The DRHP highlights that this will allow the government to exercise significant influence over the corporation.
As per the LIC Act, GoI's shareholding cannot fall below 51 percent at any point. Due to this, the DRHP said, "Our Corporation may be required to take certain actions in furtherance of the GoI’s economic or policy objectives. There can be no assurance that such actions would necessarily be beneficial to our Corporation."
It further said that the government's interests may be in conflict with the interests of other shareholders. The promoter (government) may or may not resolve any conflicts of interest in favour of LIC or other shareholders, to the extent that the shareholders may also be disadvantaged by any action the government may pursue, it said.
RELATED PARTY TRANSACTIONS
LIC, as per the DRHP, has entered into related party transactions worth Rs 43,585 crore in FY19, Rs 21,404 crore in FY20, Rs 25,172 crore in FY21 and worth Rs 17,075 crore in the six months ended September 2021.
These related party transactions accounted for 7.64 percent, 3.32 percent, 3.58 percent and 5.07 percent, respectively, of the company’s total income.
The DRHP read, “While we believe that all such transactions have been conducted on an arm’s length basis, we cannot assure you that we could not have achieved more favourable terms had such transactions been entered into with unrelated parties.”
The insurer clarified that it will enter into related party transactions in the future as well, some of which may include conflicts of interest. The DRHP further said that there can be no assurance that related party transactions, individually or in the aggregate, will not have an adverse effect on the business and results of operations.
POSSIBILITY OF FURTHER FUND INFUSION IN IDBI BANK
In 2019, the government bailed out IDBI Bank by allowing the LIC of India to own 51 percent stake in the bank. LIC infused Rs 4743 crore into IDBI Bank using policyholders’ funds.
At this point LIC does not believe that IDBI Bank will require further fund infusion, more so since the bank has come out of the prompt corrective action framework since March 10, 2021.
The DRHP further added, “However, if IDBI Bank requires additional capital prior to the expiry of the applicable five-year period and it is unable to raise capital, we would be required to infuse additional funds into IDBI Bank, which may have an adverse effect on our financial condition and results of operations.”
NON-ADHERENCE TO SEBI NORMS
As per SEBI norms, no company can hold more than 10 percent of shareholding or voting rights in more than one asset management company. LIC owns 45 percent in LIC Mutual Fund Asset Management Limited and directly owns 49.00 percent of the outstanding shares in LICMF Trustee.
Besides that, the corporation also holds 51 percent stake in IDBI Bank, which in turn holds 66.67 percent of the issued and paid-up capital of IDBI Asset Management Limited. This may bring LIC under SEBI’s lens for breaching regulations.
Due to this, the corporation is subject to further penalty, strictures or any other sanctions prescribed under the applicable laws.
DEPENDENCE ON AGENTS
LIC’s policy distribution depends on its vast network of agents with 94.78 percent of new business premiums being procured by the agents in FY21. however, the company has warned that attrition is high and it terminated services of over two lakh agents, which equals 16.59 percent of its individual agent network in FY21.
In the six months of FY22 ended September 31, 2021, the company had already terminated services of over 1.34 lakh agents which represents 9.20 percent of the network.
“We may need to increase commission and other benefits in order to attract and retain enough agents, subject to the cap on commission payable to our agents,” the DRHP read.
However, ahead of the IPO, LIC has tied up with insurance marketplace Policybazaar in a first-of-its-kind move to make its policy available through online channels as well.
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