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Who doesn’t want LIC of India’s IPO? THE SIZE MATTERS

As presumed, if the government dilutes 10 per cent of
LIC’s stake, the sum of the initial public offer (IPO) is
expected to be around ₹1 trillion to ₹1.5 trillion, which
the Indian IPO market has never seen in history. The
size would be roughly 10 times the size of the biggest
previous primary market issue and substantially
higher than the secondary market’s total cash
segment volume.

In August 2002, when Union Bank of India came out with its first public issue, then Chairman and Managing Director Leeladhar told me: “Our public issue persuaded many people in places like Uttar Pradesh where Union Bank of India has a considerable presence, to subscribe to the equity offer. The issue made many people open de-mat accounts and contributed to the proliferation of equity cult.” Similarly, LIC’s colossal issue will trigger a demat and share trading accounts opening boom, if marketed well to rope in new generation investors, instead of looking at the pockets of the existing equity market investors.

LIC of India is the country’s largest financial institution with a huge stake in India’s debt and equity markets. The Union government, at present the sole owner of the institution, is planning to sell a portion of its stake for listing on the bourse. For a listing, an institution needs to offer 15 per cent of the paid-up capital to the public. But large institutions are usually afraid of selling 15 per cent in one go for the reason of their inability to attract sufficient public interest and lack of depth in the primary market. There are already many listed firms, which are carrying a load of mandatory follow-up offers to meet the commitment of a 15 per cent offer to the public as a listing condition. Most of them are unable to make an offer at an earlier price.

Recent big issues used to depend on angel investors or someone to bail them out at the last moment. This is the market, where India’s biggest financial shark is planning to swim through with an offer that none has ever seen. While there is no doubt about investors’ interest in the LIC IPO, what may be challenging is the combined capability of such investors to satisfy the issue size.

If LIC offers 10 percent of the assumed paid-up capital of ₹25,000 crores, having a total number of 2500 crore shares with a face value of ₹10, the same roughly makes an offer of 250 crore shares to the public. If the offer price is fixed at ₹500 per share, the capital market will pump in ₹1.25 trillion and if the price is ₹600 a share, the scale will move up to ₹ 1.5 trillion. The issue will be roughly 10 times larger than the hitherto biggest public issue that the capital market has ever seen. Can the Indian primary market sustain such an oversized issue? The third biggest Indian IPO was from an insurance company, the public sector reinsurer GIC Re, which incidentally ended up with a bail-out by no other investor than LIC. The size of the issue will be many times more than a five-year aggregate of mobilisations that the capital market has seen.

No one has any doubt, LIC is a fundamentally strong institution with an inexplicable value, owing to its indomitable clout in the life insurance market. LIC is not simply the largest life insurer, but the largest financial institution, many times bigger than any financial institution in India. The enormity of the issue, with no capable institution to bail out in case of undersubscription, itself is its biggest challenge. The question of who will rescue the legendary rescuer is answerless. Can the pre-IPO advertisement campaign make its issue a success? That is also doubtful because such a conventional issue marketing approach can only target the existing primary market investors. Hence, it is time to find other methods, which would attract newer segments of investors, both retail and institutional investors. Perhaps, it is not so easy to convince investors and persuade them to bet on LIC’s shares since most of the recently listed IPOs speak the saga of losses for investors. LIC itself is a victim of the saga as it had made a huge loss in the IPOs of two public sector nonlife insurance companies.

Indeed, pricing per share and post listing performance also hold the key to public trust in the capital market. The full-size stretching of the valuation at the offer level itself without giving any space for investors to make any gain will be dangerous. We have seen many companies pricing their equity at a sky-high level leaving no space for investors to earn anything. The once bitten-twice-shy investors will wait and watch over-cautiously. This is also an important aspect that LIC management has to consider.

A conventional approach of tapping the permanent IPO investors is a risky proposition, considering the size of the offer. Issue managers will have to find new methods instead of resorting to the traditional methods and tapping existing equity market investors’ base. The success of LIC’s IPO will overwhelmingly enlarge the IPO market with massive public participation. Nevertheless, that is achievable only through a thorough homework.

LIC’s largest financial institution in terms of the overall asset under management, customer base, geographic coverage and self employment generation. None doubts LIC’s management capability. Yet, these strong points are not going to widen the scope of subscription, which requires a different strategy keeping in mind the importance of widening public awareness and wider public participation. There are people with huge investible surplus who park their money in low-yielding safe and high-yielding risky assets. On an average, if two per cent of India’s population subscribe to 80 to 100 shares, the issue can easily scrape through its mission.

It is going to be India’s most valued company with an estimated valuation of ₹10 trillion to 15 trillion on an assumed paid-up capital of ₹25,000 crores and the share offer price of ₹500-600. The market value of LIC would be roughly 10 per cent of India’s GDP last year. In terms of the valuation, a dilution of 10 per cent in LIC’s government holding means mobilisation of ₹1 trillion to ₹1.5 trillion, a size that the Indian capital market has never seen, even collectively in a single year.

It is the largest life insurer in the country, a long way ahead of the second largest. A section of a trade union within the Corporation is against its plan for an IPO. But the reasons are insensible and unconvincing.

LIC’s IPO brings multiple advantages, though the same may dry out the capital market fund for other IPOs post-LIC issues. A listing of a company also means the placement of an additional regulatory belt around it and better transparency as well as timely accountability to the public, besides corporate governance. There are intense dissenting voices, probably with many confusions, ill-conceived notions and political prejudices. Some trade union fans say the IPO is against the spirit of nationalisation. They have misunderstood the term.

Their argument is strange and senseless. They are pitiably confused about the sanctity of the nationalisation of the insurance business, which was first done by the British Government to keep India’s insurance business under its claptrap.

The section which objected to IPO didn’t know the inanity of the nationalisation of the business. IPO can be made by any eligible business establishment through regulatory approval of the prospectus. It seems the antagonists are unable to make out what the privatisation of the insurance business means and what does the opening up of the business for private players mean. They also do not know how an IPO would impact LIC’s strength adversely. Post-IPO, LIC becomes more accountable, transparent in corporate governance and answerable to every one who holds its shares, besides the stock exchange and security market regulatory authority.

The so-called objectives of “nationalisation of insurance business”, is only an absolute colonial syntax. The fundamental aim and connotation of the insurance “nationalisation” were to end the underwriting discrimination against Indians – on par with the Europeans – and the actuarial inequality that existed until 1956. The Ordinance dated 19th January 1956 that nationalised the life insurance sector (subsequently LIC Act also) was the legacy of the British ghost. It was during British rule India had the first legislation that brought state control over all insurance businesses, thanks to the Insurance Act 1938. We repeated the spirit of the legislation for the state control on insurance only to retard the sector in effect. The banking sector has never remained within the template of nationalisation, even though public sector banks dominate the sector. The industry, consisting of the public sector and private players, is controlled by a regulatory authority. Then why should insurance also go the same way? When some banks were nationalised, many banks remained private. When regulator regulates a sector national interest in it remains intact. The same principle should apply to insurance, which also has a regulator. The objective of nationalisation was not to forbid any possibility of a future IPO of LIC. IPO, in whatsoever manner, will not hurt the insurance business or any insurer. Barring strategically important establishments, all government organisations, including two general insurers, have already made an IPO. Hitherto nothing has happened to them.

The R N Malhotra Committee recommendation (1993) for opening up the insurance sector for a private player was implemented in 2000, ending the “nationalisation” forever. When the insurance sector was opened for private players, most of the entrants were public sector commercial banks in JV with and without a foreign company. LIC’s trade unions called for strikes several times, hilariously sporting their “classical” confusion about the term “privatisation.” But the end of the objective of nationalisation didn’t harm the interest of the monopoly life insurer LIC or non-life insurers. LIC’s total income in 10 years grew five times after the end of government monopoly – a track record that the objects of nationalisation could never reward. As time changes, objections to certain objectives sound reasonable perhaps with better prudence.

When we cry for a “democracy” we demand a state “control” for the lawmakers’ luxury. IPO – as a public offer – and democracy can go very well together. LIC’s IPO will make the equity market more popular and offer opportunities for people to share its hidden value and future growth. The IPO simple means this, not a sell-off in any sense. None can swallow LIC of India, but the giant can swallow everyone. The size matters. Let the capital market also see its strength.

It is an opportunity for the public to invest in the growth story of Asia’s largest life insurer and India’s biggest financial institution that has a big stake in India’s growth story.

– By Udaykumar

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