Short end of stick for policyholders

The IPO was subscribed 67 per cent on the first day of bidding. LIC policyholders led the initial bout of buying as they fully subscribed the portion reserved for them.
Short end of stick for policyholders
Representative Image Reuters

The mother of all Initial Public Offerings (IPOs) and India’s biggest public issue — that of the Life Insurance Corporation of India (LIC), went live on Wednesday. With anchor investors backing the issue of the country’s largest insurance player, the government hopes to raise Rs 21,000 cr from the IPO. It wouldn’t be a stretch to call it a watershed moment for India’s capital markets as it is anticipated that millions of new investors hailing from Tier 2 and Tier 3 towns in India will jump onto the bandwagon, sending the market into a veritable high after years of humdrum activity.

The IPO was subscribed 67 per cent on the first day of bidding. LIC policyholders led the initial bout of buying as they fully subscribed the portion reserved for them. The employee reserved portion was also fully subscribed, while retail investors subscribed 60 per cent. With regard to non-institutional investors, the subscription was 27 per cent of their portion while qualified institutional buyers bought 33 per cent of the allotted quota of 3.95 crore shares, till now.

While all the action around the IPO is only slated to get hotter as the days go by, the IPO also invited its fair share of criticisms from members of the Opposition parties. A day before the IPO on Tuesday, the Congress questioned the manner in which the government was going ahead with the IPO, especially the timing of the public issue. Among the many points of concern, the ruling dispensation’s omission in accounting for key valuation indices, as well as planning the IPO in the midst of a volatile market that was plagued by global uncertainties, particularly the Russian invasion of Ukraine, were key issues.

And it’s certainly worth pondering upon when one considers LIC’s valuation. The insurance behemoth which was valued at Rs 12-14 lakh crore in February 2022 was valued at Rs 6 lakh crore in just a matter of two months. Another argument that was presented was that while filing the prospectus in February 2022, the LIC disinvestment was aimed at 2.5 times the embedded value. Now that has been reduced to 1.1 times the embedded value.

It’s a decision that according to a few experts could set the exchequer to lose Rs 30,000 cr just from the reduction in embedded value and the paring down of the price band. Other critics, including observers in the financial markets have also spoken about how the government had cut down on the size of the IPO from Rs 70-75,000 cr to Rs 21,000 cr. The government had initially planned on offloading 5.5% of LIC’s equity base, which was subsequently pared to 3.5% of the insurer’s equity base.

LIC is an enterprise that literally kickstarted the concept of life insurance in India. It is also known to have prime properties across the nation, and their collective value is nothing short of several lakh crore rupees. For a public limited company as valuable as this, with an unblemished track record of 60 years, an IPO that is being pushed out to fuel the government’s divestment agenda, might entail substantial losses for the true stakeholders of the company, the millions of LIC policy holders.

The LIC, which had been structured as a cooperative enterprise for so long, will now have to approach the market in a span of two years — to have a public holding of 10% and 25% in a matter of five years. By then, the price at which the government stake would be diluted would be diminished significantly. Despite these concerns, initial reports suggest that the LIC IPO, when complete, would surpass previous records set by IPOs in the Indian market. One hopes the government will protect the interests of investors and policyholders even as it tries setting new benchmarks in raising funds through one of India’s most trusted institutions.

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