Three points on which LIC IPO needs to be evaluated

LIC deserves to be valued cheaply than professionally-managed, well-regulated, and transparent insurers -- just like public sector enterprises, including banks

Vijay Kumar Gaba

April 29, 2022 / 12:12 IST

The government is making an offer for sale (OFS) for 3.5 percent stake in the Life Insurance Corporation of India (LIC). At Rs 902, the lower point of the price band fixed for OFS, the LIC will be valued at Rs 5.7 trillion. At this valuation it will be the fifth-largest publicly-listed Indian entity.

The OFS will yield Rs 199.7 billion to the government, about 30.6 percent of the total disinvestment target of Rs 650 billion fixed for FY23. The government has apparently cut the offer size from 5 percent announced in February to 3.5 percent, considering the jittery market conditions. We shall therefore see multiple follow-on offers from the government in the coming years.

Ten percent of the shares offered for sale are reserved for LIC policyholders; and 0.7 percent shares are reserved for LIC employees; 31.25 percent of the offer is reserved for household (retail) investors. Applicants from these categories will get a discount of Rs 45 (Rs 60 for policyholders) on the actual offer price. For all these categories the maximum application is restricted to Rs 2 lakh; implying 230-odd shares at lower price band after discount.

LIC is an important national institution. In fact, till 2000, it was the only life insurer in India. Even after 22 years of the entry of private players in the business, LIC enjoys over 60 percent market share in the life insurance business. On the basis of gross premium underwritten, LIC is the fifth-largest life insurer in the world. Over 1.3 million individuals work as LIC agents, making it one of the largest employment providers in the country. LIC manages over Rs 40 trillion in financial assets, which is more than the combined AUM of the entire asset management industry of India. LIC owns (on the behalf of its stakeholders) about 4 percent of NSE market capitalisation. Besides SBI, LIC is perhaps the only truly pan India financial services brand. LIC is used as a generic term for life insurance in India. No surprise that LIC has been widely recognised as one of the most-trusted Indian brands.

Considering the magnitude of the proposition, the decision to invest in LIC looks pretty simple, and straightforward. Numerous reports have been published highlighting the large size, financial details, relatively cheaper valuations, and growth prospects of the LIC. However, the LIC OFS needs to be evaluated from the following three viewpoints:

LIC is a statutory corporation established under the Life Insurance Corporation Act, 1956. Besides the nationalised banks, it will be the first non-company to be listed on the Indian stock exchanges. The financial market regulators RBI and SEBI have limited jurisdiction over LIC. It is also outside the purview of the registrar of companies and NCLT. The affairs of LIC may not be as transparent as other financial services companies. Besides, the accounting methods followed by LIC may or may not be fully compliant with the generally accepted accounting principles (GAAPs).
Like all other public sector enterprises, LIC may also be subject to government intervention in routine affairs like appointment of key managerial personnel, investments, introduction and/or withdrawal of products, pricing of products, etc.
Since 2000, when the private insurers were first allowed in India, LIC has been consistently losing market share. With the popularity of digital sales channels and expansion of bank branch networks of SBI, HDFC, ICICI, it is likely that this trend may continue for many more years.

I would therefore recount my experiences of investment in Coal India (coal mining monopoly), ONGC (oil and gas exploration and production monopoly) and NTPC (power generation monopoly) at the time of listing; and also UTI (asset management monopoly) which went bankrupt due to government invention in its investment process and pricing of products.