LIC IPO: How to maximise your allocation and listing gains

IPO financing costs range between 10-12% per annum and they vary from financier to financier. (Photo by Engin Akyurt/Pexels)

The biggest IPO in the history of India opened for retail investors on May 4. 

The Life Insurance Corporation (LIC) is issuing shares worth Rs 20,557 crore in the price range of Rs 902-949, for the government to offload a 3.5% stake. The offer-for-sale issue closes on May 9 and the stock will be listed on May 17. 

 Who can bid?

Anyone who has a PAN card and a demat account. 

Thirty five percent of the issue has been reserved for retail investors–24.3% for retail investors, 10% for policyholders and 0.7% for LIC employees. Retail investors and employees get a Rs 45 discount on the offer price, while policyholders get Rs 60 discount.

To qualify for the policyholder category, an investor must have been a policy holder before February 14, 2022, and should have linked her PAN number as of February 28, 2022. 

How much can a person bid for?

For a minimum of 15 shares and then in lots–or multiples–of 15. So, you can bid for 15 shares or 30 or 45 or 60, and so on. A retail investor, employee and a policy holder can bid for up to Rs 2 lakh each. Therefore, a retail investor/employee can bid for up to 14 lots. The math goes like this: Rs 904 (which is Rs 949 minus the discount of Rs 45) multiplied by 15 (the minimum number of shares that has to be bought) is Rs 13,560. That multiplied by 14 is Rs 1,89,840. If you add another lot to it then the total becomes Rs 2,03,400, which exceeds the set limit. If the investor is a policyholder, then too she can bid for up to 14 lots. The math goes like this: the maximum she can pay for a share is Rs 949 minus Rs 60 (discount), which is Rs 889. This multiplied by 14 is Rs 13,335, which multiplied by 14 lots comes to Rs 1,86,690. If you add another lot, the total goes to 2,00, 025 which again exceeds the limit.

If she is a three-in-one investor–that is, she is a retail investor who is also an LIC employee and a policyholder–then she can bid for up to Rs 6 lakh for shares reserved for all three categories. Then she can bid for 42 lots (14 each in retail, employee and policyholder category). To bid for each category, she can use the same trading account or three different ones. 

Also read: India's biggest public issue ticks nearly all boxes on Day 1

Can you apply as a retail investor and an HNI?

Nope. If you want to invest higher than Rs 2 lakh (or Rs 6 lakh as a three-in-one investor) in the IPO, then you need to apply through the non-institutional investor or NII category (which is another name for high net-worth individual or HNI) category. NIIs have to bid for a minimum of Rs 2 lakh and can only apply through the ASBA form.

Wait! What is ASBA? 

That is Application Supported by Blocked Amount. ASBA is an authorisation given to an investor’s bank to block the money needed to buy the shares in his/her account. It will have the name of the applicant (obviously), the PAN number, demat account number, and bid quantity and bid price among other things. The money is released for the purchase of the shares only when the investor is allotted shares, after the bidding is closed. HNIs can avail the ASBA facility through banks that can offer it–called the Self-Certified Syndicate Banks (SCSBs)--and a regular retail investor/policyholder/employee can avail this facility using  UPI ID. That is, a regular investor can block the money needed to buy the allotted shares in his/her bank account with a UPI ID. 

The UPI ID can be used to buy through online brokerages as well. 

Can an investor buy through multiple trading accounts?

No. If an investor applies through multiple accounts, then all the applications will be cancelled. “You cannot have multiple applications in the same category (such as retail, policyholder etc),” said Suvajit Ray, head of product and distribution at IIFL. But a person can apply to different categories from different accounts – for example, as a retail investor in one and as a policyholder in another, he said. If a couple’s names are on a trading account, then the shares will be booked in the primary account holder’s name. If the other person has another, separate trading account, then he/she can place separate bids through that account. 

 How should an investor pick the category? 

Ray said that as an investor he would pick the policyholder category or the NII (non-institutional investor) category, since allotment in these categories are done proportionately while allotment in the retail category is made through draw of lots. Whenever there is an oversubscription–or more bids than shares to be allotted–the issuer will allot shares based on proportional basis or on a draw of lots basis. For example, in proportional allotment, if the shares are oversubscribed by 5x, then everyone gets a fifth of what they had applied for. On the other hand, in the draw of lots, allotment is made based on a lottery-like system. “So an investor can end up with zero shares,” he said.

From the sentiment so far, oversubscription looks like a definite outcome. On the very first day, 67% of the shares have been subscribed for–56% of retail investors’ quota; 184% of policyholders’ quota; 100% of employees’ quota have been booked. The institutional investors (QIBs) subscribed to 33% of their quota and NIIs (or HNIs) subscribed to 27% of theirs. 

 When placing your bid, which price should you pick?

Whichever category you pick, it’s best to pick the cut-off price aka the upper-price band to ensure that your lower bid does not become a reason for exclusion. In this case, it would be Rs 949.

Should you use financing for the IPO?

Depending on how bullish you are on the IPO, and how much cash you want to commit, you can avail financing for the IPO. IPO financing costs range between 10-12% per annum and they vary from financier to financier. But remember that the financing is required only for six to seven days because the money is deployed for the IPO on the day of the bid close (or the next day) and the refund for the unallocated shares comes back into your bank account within five days. 

The total interest cost for an application of Rs 1 crore with a 20% margin (meaning you pay 20% and the financier pays 80%) will cost roughly Rs 15,300 at the rate of 10% per annum for seven days. Assuming there is an oversubscription of say 5x, you will end up with 2,104 shares based on your application of Rs 1 crore (10,520 shares). On a per share basis, your interest cost will be around Rs 7 – Rs 15,300 divided by Rs 2,104 shares. This means you will make money on your shares once the listing price moves above Rs 956. 

Also read: Graphs that reveal truths about LIC's anchor book

Assuming that the stock lists at the current grey market premium of Rs 85 per share i.e listing price of Rs 1034, you will pocket a per share gain of Rs 69 or a cool profit of Rs 1,63,523 on your 2,104 shares and capital of roughly Rs 20 lakh. That is a return of slightly more than 8%. “As long as the oversubscription is below 10x, you could expect to make a return of 7-8%,” Ray said. But as the oversubscription levels increase, share allotments for applicants will decrease proportionately and the burden of additional interest costs will have to be borne on fewer shares, resulting in higher break-even listing price. 

Your financier should be able to help you with the various scenarios. Watch this space for more.