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The ‘biggest’ IPO listing ever

  • Category
    Economy
  • Published
    24th Feb, 2022

Context

In a bid to replenish the public coffers that have been drained out by the pandemic, India is planning one of the biggest IPO listings ever.

Background

  • On 13 February, the state-run Life Insurance Corporation of India (LIC) filed its draft red herring prospectus with capital markets regulator SEBI.
  • According to the filing, the government, which owns 100 percent stake in the company, is offering 31.62 crore equity shares or a 5 percent stake in the IPO.

Initial public offering (IPO)

  • Initial public offering is the process by which a private company can go public by sale of its stocks to general public.
  • Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital.

Analysis

What is LIC?

  • Created on: 1st September 1956
  • Headquarter: Mumbai
  • Created by the merger and nationalisation of 245 Indian and foreign insurers and provident societies in 1956, LIC has been a household name in India for decades now.
  • It was created when the government of India passed the Life Insurance of India Act, nationalising the private insurance industry in India.
  • The size: LIC is India’s biggest life insurer with 286 million policies, 115,000 employees, 1.34 million individual agents and more than 2000 branches. It has a 64.1% market share in terms of premium and a 66.2% market share in terms of new business premium.
  • The government owns 100% of LIC.
  • LIC is ranked fifth globally in terms of life insurance premium and tenth in terms of total assets. It is the only Indian player among the top global insurers.
  • Listed life insurers: SBI Life Insurance, HDFC Life Insurance and ICICI Prudential Life Insurance are the only listed life insurers in India.

Reasons behind IPO

  • The government has in recent years found it difficult to meet disinvestment targets. Divestment of stakes in Air India and BPCL has been delayed for various reasons, including COVID-19, and may see fruition this financial year.
  • The Centre has an ambitious disinvestment target of ?1.75 lakh crorefor FY22.
  • A successful LIC IPO, in which the government will sell a sizeable stake, will help it meet this goal. While a date has not been announced, the listing of LIC is expected in the third or fourth quarter of 2021-22.
  • The IPO comes at a time of tightening global financial conditions. Foreign investors have already pulled out billions this year.
  • And though it is bound to generate interest, there are concerns about the capacity of the market to absorb such a large offering.

Agenda of the offer

  • The IPO is completely an offer for sale of 31,62,49,885 equity shares (or 5%) by the promoter, which holds a 100 per cent stake in the insurance behemoth.
  • Since it's completely an offer for sale, all the proceedings will directly go to the government, which has set a divestment aim of Rs 78,000 crore in this year's Union Budget.
  • The promoter for the sale is President of India, acting through the Ministry of Finance, Government of India.
  • The retail portion has been fixed at 35% of the offer. The policyholder reservation portion will not exceed 10% of the size and may also be offered at a discount.
  • LIC’s embedded value — a measure of the consolidated shareholders value in an insurance company— has been estimated at Rs 39 lakh crore. 

Impact on LIC’s structure

  • The government used to be a 100 percent owner, now it will be a 95 percent owner. This doesn’t change anything. The management will still be chosen by the government. 

How would it help the government?

  • The government needs the proceeds of disinvestment to fund the infrastructure projects and other expenses that have built up due to the costs of the pandemic.

Is it ethical for the government to sell shared to meet fiscal needs?

  • LIC was set up with an equity capital of Rs 5 crore in 1956. The capital was raised to Rs 100 crore in 2011 to meet the regulatory norms.
  • Even this additional capital was generated internally. The LIC is a unique institution where the surplus generated through annual valuation is distributed to the government and the policyholders in the ratio of 5:95. This is now changed to 10:90 through amendment to LIC Act. 
  • The government as owner has not contributed any additional capital for the expansion of the business after initial investment. The entire growth and expansion has been done through the policyholders’ money. Even the solvency margin required as per regulations has been provided for through the policyholders’ funds.
  • This unique character of LIC makes it look like a Trust or a Mutual Benefit Society.
  • This being the character of LIC, it raises the question for the government on its ethics to sell the shares of LIC to meet its fiscal needs.

What are the pros and cons of the LIC IPO?

Pros

  • Reducing the fiscal burden on the exchequer
  • Improving public finances
  • Encouraging private ownership
  • Funding growth and development programmes
  • Maintaining and promoting competition in the market

Cons

  • Undermining investors: In a country where only around 2% of the population access the share market, unlocking the value of a mammoth financial organisation for the purpose of retail investors will undermine the interests of 130 crore Indian people.
  • Failed arguments: LIC settles 99.86% of claims and in 2020-21, it settled Rs 2.28 crore in claims, once again becoming the world number 1 in claim settlement. It has the lowest operating cost in the entire life insurance industry in India.
    • Therefore, the arguments of better transparency, policyholders’ interests, etc., totally fall flat in the face of existing reality. 
  • Focus on increasing profits: The objectives of nationalisation will recede into the background and LIC will have to concentrate on delivering increasing profits to the shareholders.
  • Loss for small and marginal players: Like private companies, it will have to target big policies that bring greater profits. In the process, the small-size policies that the poor, vulnerable and lower middle classes purchase will no longer be attractive.
  • Effect on social objective: The social objective of providing insurance cover to the weaker sections will face a setback.
  • No policies for expansion in unprofitable regions: The aim of expanding insurance in the unprofitable rural areas too will suffer. 
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