Why LIC IPO May Not Make You A Millionaire: Three Myths Busted

The much-awaited Life Insurance Corporation of India’s initial public offer (IPO) recently got the nod from the capital markets regulator, the Securities and Exchange Board of India (Sebi). All eyes are now on the IPO opening and closing dates as a lot of people have pinned a lot of hopes on this IPO, some of which may be quite misplaced.

There is in fact a barrage of misinformation going around the LIC IPO and its prospects.

Large Gains

Praveen Goutam (34) hails from the rock district of Giridih in Jharkhand and works as a taxi driver in Mumbai. Last month, he opened a demat account to invest in the proposed LIC IPO. He expected that he would make so much money that he would start his own cab service business.

Being a driver is a very tiring job and gives limited income. A friend of mine has suggested I invest in the LIC IPO as it could help me make good money. I will buy my own car with that and start my own cab service, "says Goutam, who expects to make Rs 10 lakh from the IPO.

While his dream of being an entrepreneur is realistic, the expectation that profits from the LIC IPO will be enough to start a small business may not be.

Goutam is not alone in having unrealistic expectations. Santosh Mishra, (30), a security supervisor at a residential complex in Mumbai, is keen to know the LIC IPO launch date. It is very unlikely that the IPO will hit the street in the financial year 2021-22, ending March, considering the geopolitical scenario.

How long can one stay away from their family? If I get good money from LIC IPO, I will start something on my own in my hometown, "says Mishra, who belongs to Prayagraj in Uttar Pradesh.

Let’s understand this through numbers. According to Sebi rules, one can invest up to Rs 2 lakh in the retail category.

If someone were to invest Rs 2 lakh and get shares allotted for the full amount, the LIC IPO would need to list at five times the offer price to reach Goutam’s target of Rs 10 lakh.

None of the insurance companies in India till date has seen such a bumper listing.

Besides, there is no guarantee that subscribers will get a share allotment for the full amount they invested in the IPO.

Policyholders Will Benefit A Lot

Another factor that is playing out is that LIC policyholders will have an edge. Mishra is sure he will get a subscription because he has an LIC insurance policy.

"My insurance agent told me that I will definitely get the (IPO subscription) because I have a policy, and I will also get it cheaper than others," Mishra says.

To an extent, that is correct. The LIC's Draft Red Herring Prospectus (DRHP) mentions a discount to its investors, but the quantum of the discount is not yet decided. Also, there is no guarantee that all the policyholders will get the IPO subscription if it gets oversubscribed.

Huge Company, Huge Rewards

Some people believe that LIC's size may reward investors handsomely, especially as it has crores of unclaimed money lying with it.

Sankalp Pandey, 30), a school teacher in Bilaspur, Chhattisgarh, says, "LIC has thousands of crores of unclaimed money lying with them. Where will that money go? LIC will share the money with its investors. "

It’s true that LIC has a huge chunk of unclaimed money, but it is not meant for the investors but for the policyholders.

To an extent, Pandey’s expectation is correct that LIC will share more surplus with shareholders. LIC has amended its regulations governing the distribution of surplus to shareholders and policyholders.Before this change, LIC shared 95 percent of its participating (par) surplus with policyholders, leaving only 5 percent for shareholders. Plus, LIC used to operate only one pool called "Life Fund." All that has changed now. LIC will now share the entire non-par policyholders’ surplus with shareholders. It will also increase the shareholder allocation in par category surplus from 5% to 7.5% in FY23 and FY24, and finally to 10% in FY25 and beyond.The new shareholders will benefit from these changes. 

Over-expectation may shatter your dreams. Watch this space to fulfil your dreams with realistic expectations.