Road To LIC IPO Paved With Special Dispensations
The Indian government has proposed changes to existing regulations aimed at making a share sale by Life Insurance Corporation of India attractive for investors. The initial public offering of India’s largest insurer, first proposed in last year’s budget, is key to the government achieving its disinvestment goal of Rs 1.75 lakh crore for 2021-22.
Among the exemptions being sought is a proposal that will enable the Indian government to offload stake through the IPO soon after LIC transfers its shares to the promoter against the paid-up capital. The proposed changes are a part of the Finance Bill 2021, which will need the approval of Lok Sabha, to enable amendments to the LIC Act, 1956.
According to Securities and Exchange Board of India norms, shares acquired by a promoter during past three years preceding an IPO are ineligible for computation of minimum promoter’s contribution. However, in the case of the LIC IPO, the government will be allowed to do so “notwithstanding any ineligibility for such computation or any condition for a minimum holding period under any law for the time being in force,” according to the Finance Bill.
There is an overriding provision to the SEBI norms, a senior finance ministry official said, requesting not to be identified, adding that the idea is to do the LIC IPO as soon as possible. The government would not like to wait for three years before it can issue shares against the paid-up capital invested by it in LIC and the proposed provision in the law will expedite the process, the official said.
“The concept of LIC issuing shares as security appears to have been introduced in the amendments and accordingly, shares will need to be issued by LIC to the government before the initial DRHP filing. The proposed amendments allow the government to divest these shares through an IPO without regard to the holding period for such shares, which otherwise may not have been possible under the current SEBI regulations,” Sandip Bhagat, Partner at S&R Associates, said.
The LIC IPO is now likely in the second half of the next financial year.
The government has begun the process of determining the embedded value of LIC, which has total assets worth over Rs 34 lakh crore. The government will decide on the stake to be shed at the time of the IPO after the embedded value of LIC is determined. It has budgeted proceeds of Rs 1 lakh crore in FY22 from its stake sale in state-owned banks and financial institutions.
The changes to the LIC Act signal the calibrated pace at which the government will sell shares in LIC.
The government will retain at least 75% stake in LIC for a period of five years. This, the official cited above said, is aimed at giving a message to shareholders that there will be no oversupply of LIC shares so that “those who invest do not stand to lose” as issuing shares in large volumes may impact pricing.
Bhagat said given the sheer size of LIC, the government may look to go for a lesser public float initially and reach the minimum public shareholding norms of 25% over a longer period of time as opposed to the three-year period provided for under SEBI norms.
According to SEBI guidelines, the company has to offer a minimum of 10% stake in an IPO to the public. However, SEBI had proposed to reduce it to 5% in a consultation paper issued in November 2020.
In the case of the LIC IPO, the total paid-up capital of a single shareholder has been capped at 5% in order to ensure that there is no concentration of power as the stake sale will be done in tranches, the official said. Once the public float increases, the government will increase the cap on maximum shares that can be held by a single shareholder, the official said.
Representation on LIC’s new board will be given to shareholders with up to 10% of paid-up equity capital.
Discount For Policyholders
The proposed changes to the LIC Act will open the door for around 20 crore policyholders to participate in the IPO as up to 10% of the issue size would be reserved for them. The policyholders will be offered shares at a discount of up to 10%. The move will increase the chances of LIC policyholders acquiring the shares in an event of oversubscription, the official quoted above said.
However, “the value of the allotment of equity shares to such a policyholder shall not exceed Rs 2 lakh, or such higher amount as the Central Government” notifies.
While the participation of policyholders remains uncertain, if even 25% of them seek to participate, it could add to the base of demat accounts in India which currently stands at 5.1 crore.