LIC IPO - Finding The Right Price Point For Investors

The much-awaited initial public offer from India’s largest life insurer is in final stages of preparation. Life Insurance Corporation of India Ltd.—which has undergone corporatisation ahead of the IPO—will have an equity of 632.49 crore shares of Rs 10 face value each, giving it a share capital of Rs 6,325 crore, according to the September-end shareholding disclosure on its website.

For the past year, media reports including BloombergQuint's, have indicated an approximate value for LIC at Rs 10 lakh crore. Government officials have indicated a fund raise of Rs 1 lakh crore, suggesting the issue could be a 10% divestment. Unless, based on its gauge of investor appetite, the government opts for a 5% divestment to raise Rs 50,000 crore.

To be clear, SEBI recently relaxed its minimum offer size rules to 5% of the post-issue equity, if the market value of the company—based on IPO price—is over Rs 1 lakh crore. The minimum public shareholding guideline has been relaxed as well, to reach 10% within two years and 25% within five years.

Also, all government communication so far has indicated the LIC IPO will be an offer for sale of government-owned shares. The insurer is well capitalised and has expressed no intent to raise fresh funds.

Based on the valuation estimate, that the offer will be an OFS, and the number of shares disclosed, BloombergQuint approximates the IPO price at around Rs 1,600 apiece.

LIC IPO: Determining The Right Price

At that size, LIC's IPO will be India's largest ever. It will need to generate wide investor interest, among institutions and retail.

One important constituency to achieve that are LIC's 29 crore policyholders.

The recently amended LIC Act permits the government to reserve up to 10% of the IPO for policyholders and offer shares to them at a discount of up to 10% to IPO price. The of allotment per policyholder is capped at Rs 2 lakh for now, going up to Rs 5 lakh in case of under-subscription.

Already, the insurer has stepped up communication to this large and important constituency, which for decades now has had the right to 95% of the corporation's surplus in any financial year.

LIC recently issued a public notice to policyholders informing them of the IPO reservation. It is also running advertisements prompting policyholders to link their PAN cards and open a demat account ahead of the offer.

The government will also seek to attract ordinary retail investors, as they have in previous such divestments. The Securities and Exchange Board of India permits up to 35% of an IPO to be reserved for retail investors—individuals investing not more than Rs 2 lakh. Previous IPOs of government-owned companies have provided the full 35% reservation for retail investors and it's likely the same may be considered for LIC.

But, Rs 1,600 apiece may be too expensive a share to hawk to both these categories.

In which case, the insurer could look at a stock split to convert the shares of Rs 10 face to Rs 1 face each, or issue bonus share—as allowed in the amended Act— or a combination of both corporate actions. Either route would increase the number of shares and bring the pricing to around Rs 160 a share—a price point more appealing to policyholders and retail investors.

Sajeet Manghat is Executive Editor at BloombergQuint.