The division of the share capital of the Life Insurance Corporation of India (LIC) for the first time since it was founded in 1956 is a marked departure from the divestment policy. When the government began divesting PSUs under the aegis of a divestment commission in the mid-1990s, concerns about the loss were treated as appropriate cases.
But LIC continued the trend of dividend yield, which in 2019-20 reached 27 times its share capital of 100 billion yen. The government has targeted 1.75 lakh crore from divestment proceeds in the current fiscal year in order to reduce the additional financial obligations to fight the pandemic.
As expected, LIC is slated to go public (IPO) in early 2022 to generate ₹ 1 lakh crore by selling an initial 10 percent of its equity. That IPO may need to be split into two tranches within a few months to ensure the market is able to absorb its mammoth size.
LIC management may also need to consider SEBI’s requirement that promoters (the government) must not dilute their stake below 20 percent within 18 months of going public.
In March 2021, LIC still dominates around half of the country’s life insurance market (49.87 percent), the rest is shared by 23 private players.
LIC’s market share of 66 percent as of March 2020 declined mainly because private players resort to online mode when collecting new business, as opposed to LIC’s marketing efforts, which are essentially based on the traditional mode supported by its agents will. Surveys show that people today invest 28 percent of their fixed assets in life insurance, exceeding the 26 percent for fixed-term deposits.
Profits after listing
Given the business outlook for LIC and a gigantic fund of policyholders of 34,87,654 crore in its kit, the public offering is sure to be oversubscribed many times in anticipation of huge profit after IPO.
The IPO market has been booming since the beginning of 2021 despite the second wave of pandemics from April to May. More than 70,000 crore has been raised to date in 2021, including the notable editions of Zomato, DHFL, RCom, and Paytm.
LIC’s authorized share capital has now been set at 25,000 crore to facilitate its IPO. That was just 5 billion yen at the time of its inception, when the government at the time strongly advocated nationalization due to the regular failure of private insurance companies.
The LIC law was passed in parliament to shape it as a public corporation. After the IPO is completed, however, the organizational structure will change to a listed company. Investors will certainly need to quote a price much higher than face value in order to subscribe within the minimum and maximum price range.
In this way, LIC is set to become an Indian company with a huge market capitalization, if not the highest among all sectors. As of March 2020, private insurers have a combined market capitalization of 27.987 billion yen.
The embedded value is considered to be the most suitable for evaluating an insurance company. It comprises the net asset value or the net assets of the company, represented by the market value of the company assets attributable to the shareholders, as well as the present value of the future expected profits of the company from its existing business portfolio. LIC has commissioned EY to evaluate its shares.
In July, the government announced an increase in foreign investment in the insurance sector from 49 percent to 74 percent of a company’s share capital. This would pave the way for inviting foreign capital and would even sacrifice computational control of property to the government.
Earlier in 2015, when the foreign limit was raised by 26 percent, it was said that control would still remain in Indian hands, either state or private.
With this decision, however, insurance companies only have to formally apply to the IRDA for an increase in foreign investments. The government has categorically stated that the sale of LIC shares has nothing to do with privatization or opening up to foreign investors.
The author is Professor of Commerce, Vidyasagar University, Midnapore, West Bengal