The government has changed the rules of the Foreign Exchange Management Act (FEMA), paving the way for up to 20 percent foreign direct investment in insurance giant LIC.
The government plans to dilute its stake in LIC through the initial public offering (IPO). In February, LIC submitted the draft Red Herring Prospectus (DRHP) to the market regulator Sebi for the IPO.
Last month, Sebi approved the draft papers, and the insurer is in the process of submitting an application for a proposal with amendments.
Following Cabinet approval, the Department for the Promotion of Industry and Domestic Trade (DPIIT) amended the Foreign Direct Investment (FDI) policy on March 14 to facilitate foreign investment in LICs ahead of the mega exchange offering.
FEMA’s notification was necessary to implement the provisions of the DPIIT issued through a press release, including amendments to the FDI Policy that will allow large foreign portfolio investors to subscribe for shares in LIC.
“These rules may be referred to as the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2022,” reads a recent Gazette notice.
The notification inserted a paragraph into the existing policy allowing up to 20 percent foreign direct investment in LICs through the automatic route.
Since the foreign inflow cap for public sector banks is 20 percent below the government’s approval path under the current FDI policy, it has been decided to allow foreign investment of up to 20 percent in LICs and other such entities.
“Foreign investment in LIC is subject to the provisions of the Life Insurance Corporation Act, 1956, (LIC Act), as amended, and the provisions of the Insurance Act, 1938, as amended, as applicable to LIC,” it said.
Sebi has approved the draft prospectus for the sale of a 5 per cent stake by the government for an estimated Rs 63,000 crore, setting the stage for the country’s largest IPO to date.
According to the draft, the embedded value of LIC, a measure of an insurance company’s consolidated shareholder value, has been set at approximately Rs 5.4 lakh crore as of 30 September 2021 by international actuarial firm Milliman Advisors.
Although the DRHP does not disclose the market valuation of LIC, by industry standards it would be around three times the embedded value of around Rs 16 crore.
The public offering of LIC is expected to be the largest IPO in the history of the Indian stock market. Post listing, LIC’s market valuation will be comparable to top companies such as RIL and TCS.
So far the amount mobilized from Paytm’s 2021 IPO has been the largest ever at Rs 18,300 crore, followed by Coal India (2010) at almost Rs 15,500 crore and Reliance Power (2008) at Rs 11,700 crore.
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