The maiden initial public offer (IPO) of Life Insurance Corporation of India (LIC) is closing today with over 2.04 times subscription, leaving experts guessing over the fate of another round of equity dilution by the government.
LIC policyholders made a strong dash for the issue by subscribing to 5.39 times their allotted portion, while the employees of the corporation put in bids equivalent to four times their quota. Retail investors bid for a record 1.72 times their allotment, while the reserved portion for non-institutional investors was booked 1.39 times and QIBs portion 1.17 times as bidding came to a close on May 9. Although the demand from high net-worth individuals and institutional investors have hardly been encouraging, the issue was fully subscribed.
The prevailing market sentiments, however, seem to have dented the prospects of a bumper listing for LIC as it is reflected in the decline in grey market premium (GMP) today. As per IPO Watch, which tracks the grey market, the GMP for the stock declined to Rs 40 from Rs 60 on May 7.
The government aims to garner Rs 21,000 crore by liquidating 3.5 percent stake in the state-run insurance major but has also ruled out any further stake sale in LIC over the next one year, after which there might be a few more rounds of equity dilution to achieve its divestment target and to bring down its own holding in compliance with the regulatory requirements.
Next round of equity dilution
According to the Securities and Exchange Board of India (Sebi) guidelines, listed entities with over Rs 1 lakh crore valuation need to have at least 25 percent public shareholding within five years of listing. But the government had exempted public sector entities from this norm.
“We do not expect further dilution by the government for the regulatory requirements, however, for another capital raising through divestment, the government could offload more of the stock next year,” said Sonam Srivastava, Founder of Wright Research.
Some experts said that top officials of LIC had clarified while answering questions from prospective investors during roadshows, that the Government of India does not have any plan of further dilution of its stake in the corporation as LIC has sufficient capital for the next two years and won't require any funding support from the government.
“The government is unlikely to further reduce its stake in the insurer for at least the next two years because such a move could affect returns for investors participating in the mega initial public offering (IPO),” Mohit Nigam, Head - PMS, Hem Securities, said.
Impact of further equity dilution on the stock price
The question that arises in this scenario is how the next round of divestment, whenever it happens, will play out on the stock price. Experts are of the opinion that even though the follow-up issue might have some impact on the prices, the company will remain an attractive investment option for investors, given its size and stand in the insurance sector.
“As with any company which has some overhang – whether it is private equity holding that would necessarily get diluted (because funds have investment horizons) or with Minimum Public Shareholding (MPS) rules to be complied with – there will be some pressure on the price around the event, but I don’t see it as necessarily impacting the long-term trend negatively,” said Venkatraghavan S, Managing Director and Head of Equity Capital Markets at Equirus.
If there's a follow-on public offer next year, the response from investors will depend primarily on three factors - the returns from the IPO, the performance of the company an the stock through the one year, and the market environment.
“LIC being a massive company with a considerable market share will continue to be attractive in the listed space, even though the insurance industry is becoming competitive with the listed players,” Srivastava said.
There are some market observers who see the follow-on issue impacting the stock to a certain extent. “In the past, we have seen PSU (public sector undertaking) stocks coming under selling pressure on the expectation or announcement of a fresh OFS by the government and in the case of LIC we do not expect anything different unless LIC performs exceptionally well in the meanwhile and funds fall over one another to own some stake in it,” said Deepak Jasani, Head of Retail Research, HDFC Securities.
FPO will then give such an opportunity and hence the stock price may remain firm in that scenario.
Will the stock make it to any of the indices?
The criteria for inclusion in the Nifty 50 and the Sensex are highly stringent and based on free-float market caps. With only 3.5 percent public holding, the stock’s free float market cap may not reach the level required to become an index stock shortly.
“A further stake sale would increase the liquidity in the stock and increase the probability of it getting to the major indices, which is welcome,” said Srivastava.
Low free-float market capitalisation may act as a hurdle for LIC's inclusion into major indices such as MSCI, FTSE, Nifty and Sensex.
“Companies are eligible for inclusion in the Nifty 50 provided its average free-float market capitalisation is at least 1.5 times the average free-float market capitalisation of the smallest constituent in the index,” said Jasani of HDFC Securities. “Once that happens and it is included in the indices, passive funds will have no choice but to buy it in the respective weights in their portfolio.”
The fact that LIC is a pioneering giant in the insurance space, it will generate investor interest from the day one and Venkatraghavan of Equirus don’t see fund managers waiting for it to become an index stock to take note of it.
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