India’s financial markets are on the verge of a milestone: the IPO of insurance giant Life Insurance Corporation (LIC).
In fact, the much-anticipated initial public offering (IPO) of LIC is just around the corner. The IPO may be delayed due to market volatility caused by the Russia-Ukraine conflict. As the largest life insurance company in India and the fifth largest in the world, LIC’s listing on the stock exchange will change many things in the Indian capital market.
First of all, investor portfolios will change as LIC shares trade on exchanges. After all, experienced investors cannot afford to ignore the market leader in life insurance, which has a market share of over two-thirds. Even on a generic level, when designing portfolio structures, investors always prefer the leader in a sector.
The second reason that contributes to investor interest in LIC is the undersupply of the life insurance market in our country. Despite the fact that LIC underwrites millions of insurance policies, the ratio of insurance premiums to GDP in India is 3.7 percent, well below the global average of 7.23 percent. This means that most Indians have insufficient life insurance compared to citizens of other countries.
The third meaning of LIC’s listing is the potential change in benchmark indices. It is possible that LIC will be included in the S&P BSE Sensex and Nifty50 very soon. This would mean another large-cap company being replaced by LIC. Once that happens, we may see a market shift as investor portfolios are adjusted to the country’s largest insurer.
The fourth important aspect of LIC’s listing has to do with the insurer’s disclosure about its portfolio. With assets worth Rs 39 trillion, more than the entire mutual fund industry combined, LIC is the largest investor in government bonds and equity investments. Once listed, LIC, like any other publicly traded company, is required to make quarterly disclosures of its financial information. This will allow all market participants to review the changes in LIC’s portfolio and receive important notices.
The IPO of LIC has already caused euphoria in the market and not a day goes by without a press report about the IPO. The government’s bid to sell a 5 percent stake or 316 million shares will make LIC the third most valuable company in India.
The Draft Red Herring Prospectus (DRHP) filed by LIC with the Securities and Exchange Board of India (SEBI) provides a comprehensive insight into how Indian households are increasingly investing in financial assets. Between 2012 and 2020, household savings in financial assets rose from 31% to 41%.
The capital markets in India will get a much-needed boost from LIC’s IPO. It has already sparked a surge in new Demat account openings after the insurer encouraged existing policyholders to open Demat accounts. LIC policyholders may receive a discount on the price of the shares offered at the IPO. Depending on the valuation, the government is likely to give up 5-10% of its stake in LIC.
Policyholders have a special reservation of 10 percent of the issue volume. There is a possibility that this (policyholder) class will receive LIC shares at a discount to the price set in the bookbuilding process for the IPO.
The Indian stock market needs a boost as barely 3 to 4 percent of Indians own equity assets. We believe this number should be much higher as time has shown that stocks outperform all other types of financial assets including bonds, real estate and gold. Let’s hope that more and more Indians will take note of this reality and start investing in stocks at the earliest.
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