LIC IPO: The state-run insurance company Life Insurance Corporation of India (LIC) with its unique blue and yellow colors can be easily found everywhere in the country of 1.4 billion population of India. LIC holds two-thirds of the insurance market. It has about 30 crore policies, more than 13 lakh agents, more than 1 lakh employees, 2,000 branches and more than 1,500 satellite branches. The government is now preparing to sell its 5 percent stake in LIC through IPO and this could be the biggest IPO of the country so far. At the same time, at the global level, this will be the fourth largest IPO of any insurance company so far. Let us try to understand every point related to this IPO.
1. Why is the government selling its stake?
The government has set a target of raising $10.4 billion through the sale of assets. The sale of stake in LIC is an important and major part of this asset sale programme. At the same time, this sale is also important to meet the budget deficit of the country. The government plans to increase borrowing to record levels in the next fiscal as it tries to come out of the post-pandemic slowdown.
2. When will IPO come?
Finance Minister Nirmala Sitharaman has set March 31 as the deadline for listing the IPO. This IPO was first to be brought in April 2020. However, it was delayed due to the challenges related to the corona virus.
3. Why is it so difficult to do LIC valuation?
Calculating the size of LIC and the value of its special status in India is a unique challenge. LIC has assets worth $530 billion, which is more than the total size of the mutual fund industry in the country. Firms such as Milliman and Ernst & Young were appointed to determine the valuation of LIC, which reviewed millions of existing policies and their premiums on various parameters. Apart from this, he also had to weigh the fixed properties of more than 2,000 branches of LIC. As of now LIC issues its balance sheet only once in a year, it is difficult to compare it with other peers on quarterly basis.
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4. What can be the potential value of LIC?
According to several reports, LIC plans to raise funds between $5 and 13 billion. The government recently slashed its disinvestment target by almost half for the current financial year. With this it is expected that LIC will raise less amount than was being estimated earlier. At present, the government can sell 5 per cent stake. The country’s biggest IPO till date has been of $2.5 billion Paytm, which came in November last year. LIC is going to break this record.
5. Why does this IPO matter?
A stake sale in a company that is so deeply rooted in the country’s history and directly related to such a large population is not seen daily. LIC has made a big impression on the financial system of the country. It was created by the then Prime Minister Jawaharlal Nehru in 1956 by merging 256 insurance companies and Provident Fund societies. For the last two decades, many private insurance companies have also come into the country. Although still for crores of Indians, the meaning of insurance remains LIC.
6. Are there similarities in other countries?
Some bankers are calling this sale India’s ‘Saudi Aramco’ moment. Saudi Aramco is a Saudi government-owned oil sector giant. In the year 2019, Saudi Aramco brought its IPO, which is the largest IPO in the world so far. 90 percent of the Saudi government’s earnings come from the Saudi Aramco company, so its listing was a symbol of Saudi Arabia’s economy.
7. Will investors repose confidence in this?
Some investors have raised doubts whether the 65-year-old LIC will be able to compete with private insurance companies. LIC is different in many respects as compared to other insurance companies of the country. It was established in 1956 by passing a law in the Parliament. Its policies would have a sovereign guarantee, which allows it to trade on a lower capital base than other companies. The government has been using LIC for years as a last resort to protect other companies and support the market. LIC has on many occasions saved them from sinking or falling by investing huge money in the market and other companies. Recently, in the case of IDBI Bank in 2019, the same was seen. Some bankers say that there is a concern of global investors that the government may force LIC to save other government companies in similar trouble even after listing.
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