Why LIC’s big stock sale is a big deal

NEW DELHI: Until the early 1990s, buying an LIC policy was usually the first thing you did after getting a job. Years have passed, the insurance business was opened up to private players in 2000, but ‘LIC’ continues to be used as a synonym for life insurance even today. Now, with time running out for the government to unload up to 10% of the capital of the country’s largest insurer, one could be forgiven for indulging in some nostalgia. Finance Minister Nirmala Sitharaman has said that the government proposes to launch an initial public offering (IPO) for LIC by March 2022. There are indications that the draft prospectus for this IPO may be filed with the regulator SEBI Fellow later this month.
India’s largest insurer
Since its inception, LIC has grown by leaps and bounds. By September 2021, the initial capital of Rs five crore had grown into an asset base of over Rs 38 lakh crore. And according to a Brand Finance Insurance 100 survey report, the LIC brand is the third strongest and 10th most valuable brand in the world. Moreover, almost two decades after the opening of the insurance sector to private players, LIC holds 66.18% of the “First Year Premium” revenue share and 74.58% of the number of policies. In 2020-2021, it sold 2.1 crore new fonts or well over 57 lakh new fonts, on average, per day. It employs over a lakh of Indians and over 13 lakh of commission agents.
LIC, the insurer
Value of policies sold

LIC has been a traditional haven for the middle class; employees still keep some of their hard-earned money by buying insurance from the ubiquitous LIC agent. With so much of the middle class sentiment invested, is it any wonder that the government’s decision to divest of the minority stake in LIC has sparked heated debate?
A big investor too
Pranav Haldea, Managing Director of Prime Database Group, says, “Due to its size and assets under management (assets under management), LIC is the most dominant player in the Indian stock market. LIC has also been repeatedly called upon to rescue divestiture deals and follow-on offers from public sector companies and banks, as well as counter the sale of REITs and bring stability to the market. LIC has traditionally been a contrarian investor in the market and has invested when market sentiment was not so good. »
LIC, the investor

lic2

Total LIC (or AUM) investments in March this year were Rs 36.71 lakh crore against a net AMU of over Rs 31.42 lakh crore for the entire mutual fund industry. And even though his stake in NSE-listed companies slipped to an all-time low of 3.66% in March (3.7% in December 2020, much higher from 5% in June 2012), the value of his holdings increased by 6.3%. quarter on quarter at Rs 7.24 lakh crore. LIC was making a profit offloading some of its shares to NSE in the March quarter.
In terms of ownership by number of shares (average LIC ownership as % of total share capital across all NSE listed companies), LIC owned just under one percent (0.85%) of NSE shares in March. It continues to take the lion’s share of insurance company equity investments (76%). LIC’s stake in some of India’s blue chips: in RIL it was Rs 74,437 crore or more than 5%; in TCS, LIC held shares worth Rs 45,724 crore or almost 4%. In Infosys, his stake was worth Rs 34,187 crore, in State Bank of India it was worth nearly Rs 30,000 crore, in HDFC Bank nearly Rs 23,000 crore and in Hindustan Unilever it was worth nearly Rs 20,000 crore. In terms of ownership percentage, LIC held the highest stake of 49% in IDBI Bank. nearly 14% of L&T and nearly 12% of Oil India Ltd. LIC invested an additional Rs 3,501 crore in TCS during the March 2021-22 quarter and its investment in Bajaj Auto increased by almost Rs 7,000 crore in these three months.
How big will the IPO be? There’s no official word yet on LIC’s rating. But the market capitalization is expected between Rs 9 lakh crore and Rs 11 lakh crore, lower than RIL or TCS but higher than standalone HDFC, says Deven Choksey of wealth management firm KR Choksey Holdings. “The age of an insurance company is directly proportional to its profit potential and therefore LIC should be profitable for the investor,” he adds. Aggressive IPO pricing for these two insurers in 2017 resulted in losses for investors, and stock prices continue to be heavily discounted from their IPO price even today.
Who is interested : The IPO may appeal to retail investors as LIC has a strong balance sheet and the insurance business has significant growth potential given the dismal global penetration. reserve part of the show for both categories. This means that policyholders and employees can get LIC shares at a discount. In addition, policyholders can benefit from greater transparency after revealing where all their money is invested. The government has already clarified that the sovereign guarantee on policyholders’ money will continue.
Voice against the public question: The LIC employee federations protested against the sale of shares, citing several reasons. In a letter to Sitharaman last year, they said the growth in the number of insureds and claims payments had been achieved “entirely through the generation of internal resources. The government made no further contribution to the initial capital of Rs 5 crore made in 1956, which was increased to 100 crore in 2011 due to regulatory issues. On this meager capital base, LIC today manages assets exceeding Rs.32 lakh crore. P Satish, zonal chairman of the All Indian Insurance Employees Association, says only 5% of LIC’s annual surplus is currently returned to the government, with 95% going to policyholders as bonuses. “This calculation will change as the number of shareholders will increase after listing. And when the IPO takes place, global experience shows that the pursuit of profit could drive LIC to more and more investments through risky instruments .
The history of the LIC: The insurer was established in 1956, when 245 Indian and foreign insurers and provident societies were taken over by the central government and nationalized. It was formed by the LIC Act of 1956 with a capital contribution of only Rs 5 crore from the government and remained a monopoly until 2000 when private insurers were allowed entry. Apart from domestic operations, it has three branches outside India – in the UK, Fiji and Mauritius. It also has a wholly owned subsidiary in Singapore and joint ventures in Bahrain, Kenya, Sri Lanka, Nepal, Saudi Arabia and Bangladesh. In India, LICI’s subsidiaries include LIC Pension Fund Ltd and LIC Cards Services Ltd. Its associates include IDBI Bank Ltd, LIC Mutual Fund. and LIC Housing Finance Limited.
LIC for Government: LIC has often been a knight in shining armor for the government, investing large sums of money in public sector entities and infrastructure projects. In the past, LIC saved IDBI Bank from collapse by injecting money; one of India’s largest non-banking financial companies, IL&FS, was also rescued by this state insurer with the timely injection of a large tranche of funds. According to data from RBI, LIC investments in public sector enterprises have increased year on year and this amount has more than doubled between 2015 and 2021. The figure was nearly Rs 27.7 lakh crore in March 2021 , up from nearly Rs 25 lakh crore in March. 2020 and roughly Rs 13.7 lakh crore in 2015.
Even the proposed IPO will help the government meet its divestment revenue target for 2021-22. To initiate the IPO, amendments to the Life Assurance Company Act 1956 have already been made. The amended law provides for a dilution of the State’s participation and stipulates that the dilution cannot exceed 25% over the next five years. This means that the government’s stake in LIC cannot fall below 75% for five years after the IPO. The amendment also states that the government must retain the majority of 51% at all times, which means that the government can gradually reduce its stake over the next few years and eventually up to 49% of LIC can be in private hands. .
While the debate rages over whether a publicly listed LIC is more transparent and better able to protect the investments of the aam aadmi than a fully disclosed company, perhaps a successful listing would silence the opponents.

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