It’s saral. At 66, she would be mature enough to don a new look, and step out into the open.

LIC gets ready to go public. The Life Insurance Corporation – often a lifeline for the government in times of crunch – comes handy when the finance minister works out a Rs 1.75-lakh-crore cash jab for a staggering economy. Billed to be valued at anything between Rs 90,000 crore and Rs 1.3 lakh crore, the maiden public issue will be the biggest in the history of the Indian capital market.

Listing LIC, a plan the ministry has been working on for over a year, comes as the obvious choice for the government to weather the rough winds after the worst marauder in human history, the COVID-19 pandemic, drove most global economies down to their knees. The toll has been such that the finance minister had to put a general insurance company also on the block along with two public lenders, and widen the door to foreign funds into the insurance sector up to 74 per cent, to fund this Rs 1.75-lakh-crore capital expenditure.

While drafting her Budget for the fiscal 2021-22, Finance Minister Nirmala Sitharaman opted for selling assets, instead of slapping new taxes on the people and businesses, to secure growth for the economy. She has set 2021-22 as deadline for completing strategic divestment in public sector entities like Bharat Petroleum Corporation (BPCL), Air India, Shipping Corporation of India (SCI), Container Corporation of India, IDBI Bank, BEML, Pawan Hans and Neelachal Ispat Nigam Ltd.

Markets cheered the move and indices went on a rally on Monday. The S&P BSE Sensex surged over 3,300 points in just two sessions after the Budget was tabled. Most brokerages called the proposals “pro-growth” that will lead to a “capex-driven revival for the economy” from the COVID-19 woes.

The disinvestment overdrive of the government comes as a huge boost for the green shoots of recovery that have begun showing up since the authorities lifted the COVID containment measures. The biggest of the divestments – the initial public offer (IPO) of LIC – is expected to hit the market around October, while the government looks to complete the process for BPCL and IDBI Bank by September 2021.  

According to Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey, the government has introduced the legislative amendments required for diluting its stake in LIC and IDBI Bank through the Finance Bill 2021. It has also received the preliminary expression of interest for stake sale in Bharat Petroleum Corporation (BPCL) and Air India, while the same for SCI is due on February 13.

“The LIC Amendment Act and the Amendment to IDBI Bank (Transfer of Undertaking and Repeal) Act have been made part of the Finance Bill. There will be no separate Bill. The LIC IPO would come post-October,” says Pandey.

DIPAM, which manages the government’s equity in state-run companies, has signed up actuarial firm Milliman Advisors for ascertaining the embedded value of LIC, while Deloitte and SBI Caps have been appointed as pre-IPO transaction advisors.

Although the finance minister did not disclose the size of the stake that would be up for grabs in the first tranche, the Finance Bill says that the government may dilute up to 25 per cent holding in LIC within the next five years but will never let its share fall below 51 per cent. The initial divestment is likely to be 10 per cent with the government keeping 15 per cent more as rain check. The public issue will keep its 10 per cent for policyholders. “There will be a 10 per cent discount for policyholders investing in the IPO,” the Bill says.

The state-run insurer is believed to be worth anything between Rs 9 lakh crore and Rs 13 lakh crore, according to independent valuation firm RBSA Advisors. The agency based its calculations on the market capitalisation (M-cap) as a percentage of assets under management (AUM), which is lower for LIC, compared to its listed peers like SBI Life Insurance, HDFC Life Insurance and ICICI Prudential Life Insurance. A more accurate valuation is expected when the embedded value of the insurer will be calculated.

“We are yet to see how the business gets defined once it is corporatised. The true valuation will be derived thereafter, but it will be one of the mega large caps no doubt,” bets Equirus Capital Managing Director Ajay Garg.

LIC, which will turn 66 this September, controls nearly 70 per cent share of the market by managing more than Rs 32 lakh crore of policyholder assets. This accounts for almost 80 per cent of the assets managed in the sector, or roughly 12 per cent of India’s GDP. A claim-settlement ratio of 98 per cent has resulted in every three out of four policies sold in the country belonging to the state-run insurer.

A monopoly till 2000, when the government first liberalised the insurance sector, LIC controls the largest share of the pie because of its unique franchise and customer-acquisition model that is hard to replicate. A distribution franchise of nearly 11 lakh agents constitutes more than 50 per cent of the total agency force for the life cover sector in India and one of the largest in the world. While the top five private insurers in the country registered flat profitability through the five years from 2014 to 2019, LIC sustained its growth in bottomline.

The insurer hedged itself from volatility in the market with a strong focus on traditional products, unlike its private peers that push for easy-to-sell unit-linked insurance policies (Ulip). The sustained growth in profitability and a robust market presence makes LIC the second largest financial services institution in India with a Rs 31-lakh-crore balance sheet, close to the country’s largest lender State Bank of India (SBI), which has assets worth Rs 39.51 lakh crore.

It’s lonely at the top and so is it for the country’s largest life insurance company when it comes to revenues. LIC mopped up Rs 57,958 crore in first-year premium and Rs 1,20,317 crore in single premium in 2019-20, while renewal premiums stood at Rs 2,01,113 crore, raising its topline to Rs 6.15 lakh crore. Reliance Industries Limited, the largest Indian corporate, ended the year with a topline of Rs 3.65 lakh crore.

Healthy premium growth, led by a steady rise in awareness, innovative products, evolving underwriting and aggressive distribution strategy have led to a stellar performance by listed insurance companies in the past one year. For HDFC Life, the premium growth has been 48 per cent, for SBI Life, 47 per cent, and for ICICI Prudential, 38 per cent.

It is perhaps the sovereign guarantee of return from the government that comes bundled with every single policy that has made LIC synonymous to insurance among the Indian populace. In a post-Budget interaction with the media on Monday, Sitharaman assured the policyholders that their interests would be protected when the government dilutes its stake in LIC. “We are bringing an initial public offering, and not selling it completely. There will be no change in the ownership.”

For the individual Indian investor looking at the public issue, the continuity of the guarantee comes as a great assurance of return. “By listing the insurer, the government will make the operations of LIC more transparent and the common investor will be able to find out where his money is being used,” says Madhukar Ladha, Institutional Research Analyst, HDFC Securities.  

The government has designed the public issue such that long-term employees of LIC are not left out. The divestment process will have a special quota where they could buy the shares at a 10 per cent discount. The development assumes significance since the government is expecting a huge demand for the public issue.

For ages, LIC has been the biggest instrument for tax savings under Section 80 C of the Income-Tax Act. The government safeguarded the interest of LIC’s 11 lakh agents by not proposing any change in the system. Withdrawal of the sop would have reduced the attractiveness of insurance policies for certain category of customers and made it harder for the agent to sell policies.

Setting a value for LIC is one of the toughest tasks because of its closely held nature of operations. One reason is that it is governed by the LIC Act of 1956 with the sector watchdog Insurance Regulatory and Development Authority of India (IRDAI) having very little say in regulating its operations. The insurance giant has total investible assets in excess of Rs 31 lakh crore. This is more than the entire domestic mutual funds (MF) sector, which manages assets worth Rs 28 lakh crore. The public sector unit (PSU) has 67 per cent of its assets invested in Government Securities (G-sec), 15 per cent in equities, 7 per cent in other approved bonds, 3 per cent in investment properties and the rest in mutual funds, subsidiaries and other debt securities.

An RBSA Advisory report pegs LIC’s cost of investments in unlisted equities at Rs 1,338 crore, while in subsidiaries and joint ventures at Rs 25,488 crore. LIC Housing Finance, which is 40 per cent owned by LIC, is valued at Rs 15,740 crore, and IDBI Bank, majority owned by the corporation, is valued at Rs 39,000 crore.

Many assets have not been recorded on the balance sheet at fair value, according to the report. LIC has eight zonal offices and 113 divisional offices. It serves the customer through 2,048 branch offices, 1,526 satellite offices, and 3,354 mini offices. Its freehold land is valued at Rs 91 crore and leasehold land at Rs 76 crore. LIC buildings are valued at Rs 1,750 crore.

“The valuation of the corporation will be based on several factors like products, real estate, assets and investments. The totality of all that plus the brand value,” LIC Chairman MR Kumar was quoted as saying in the media recently.

Listing the biggest public sector insurer is not going to be an easy task for the government. The Indian capital market has traditionally been lukewarm to any PSU entrant. A lower valuation is the norm for any state-run company at the time of listing, compared to a privately held corporation, because of transparency issues.

For LIC, capital allocation could be a hurdle in valuation. Moreover, the government has long been harping on LIC as an investor of last resort when it comes to bailing out any cash-strapped public entity. This was seen even in the case of IDBI Bank. The Centre had turned to LIC, seeking to resolve liquidity issues plaguing the lender. “The rising exposure of LIC in companies facing liquidity crisis has been a cause for concern for a while,” says Ajit Singh, Vice-President of Metropolitan Stock Exchange (MeSE).

The Centre has to put its House in order as it prepares for listing LIC. Floating the public issue would call for amendments to the LIC Act, 1956, under which the corporation was established. The Act deals with the way the corporation handles its corpus. LIC has to distribute its total surplus in a ratio of 95:5 towards Non-PAR and PAR policyholders. The fate of this arrangement would play a significant role in LIC’s future valuation.

The LIC Act amendment will require parliamentary approval, which is not going to be a cakewalk for the government, as interests of many stakeholders such as employees, agents and policyholders will have to be taken into account. This process may face many roadblocks.

Assuming LIC’s valuation at the time of the IPO at Rs 10 lakh crore, a 10 per cent stake sale would lead to issuance of shares worth Rs 100,000 crore. This will make it the country’s biggest IPO after Coal India, which had raised Rs 15,000 crore in 2010. “Liquidity is not an issue at all. We have seen the amounts of oversubscriptions in the recent IPOs from all sets of investors. We have more than adequate liquidity in the market. However, pricing is something which all investors will be looking at,” Pranav Haldea, Managing Director of Prime Database, says.

“The market has always welcomed the government as a promoter and there are enough examples in the past, when issuances from the Centre have been well received. Take for example the Maruti Suzuki IPO in 2003. It was well priced and received an overwhelming response from investors across the board,” he says.

But there are some contrarian views too. A section of the market feels that LIC is still a ‘black box’ for investors on the disclosures front. For the IPO to succeed, disclosures made in the draft red herring prospectus (DRHP) will play a crucial role as details about its holdings in corporate bonds and equity portfolio will be awaited eagerly.

The fear of the IPO sucking away the secondary market liquidity is completely unfounded, feels Haldea. He says this argument assumes that there is finite liquidity in the system, which is not the case. “It will be a mistake to assume that a huge company tapping the primary market will result in transfer of liquidity from the secondary market as there is enough source of liquidity for the good quality paper at an attractive valuation.”

And, of course, there are worries from the recent experiences. Finance Minister Nirmala Sitharaman’s move to sell government holding in large PSUs like Air India and BPCL failed to trigger encouraging investor interest in the current fiscal. Even the merger of Mahanagar Telephone Nigam Ltd (MTNL) and Bharat Sanchar Nigam Limited (BSNL) failed to enthuse the market.

“These weren’t monetised at the right time, and they didn’t have much value left at the time of dilution, except for their real-estate assets,” says Garg of Equirus Capital. But in case of LIC, the insurer is in its prime if it goes public now. “Unlike Air India, which is a difficult equity story to sell, LIC will be game-changer.”

There’s a note of caution, though, from Singh of MeSE. “If the government succeeds meeting its targets, then it will be able to create a sustained buoyancy in the economy, which alone can foster a favourable atmosphere for the market to offer the best response to mammoth IPOs of the size of LIC,” he says.

Although the finance minister received great response from all quarters for her growth-oriented Budget, there has been an underlying worry over India’s widening fiscal deficit which, she estimated, has far outgrown the budgeted projection of 3.8 per cent to 9.8 per cent in the current financial year. Sitharaman has promised to narrow down the gap to 6.5 per cent in the next fiscal.

Towards bridging the fiscal gap, the finance minister has listed a general insurance company for sale. There are five government-owned non-life cover companies – General Insurance Corporation, New India Assurance Company Limited, Oriental Insurance Company, National Insurance Company and United India Assurance Company Limited. With the first two of these being already listed on Indian bourses, one of the remaining three qualifies for privatisation this time.

There was a proposal to merge the three general insurers before dilution of stake to get a better valuation. But it was shelved because of its complexity. Solvency is again a major issue for all three entities. If one of the three is privatised, then recapitalisation to other two cannot be ruled out.

The government may also bring in a strategic investor for one of the listed entities, sell off its majority stake (51% or more), and exit. The opening up of the insurance sector up to 74 per cent foreign direct investment (FDI) will also help the government dilute its stake in any of the general insurers.

While hailing the finance minister for her bold budget proposals, experts have reiterated that everything hinges on the timeline the government has set for itself. “The goals of disinvestment are very lofty and if these are not met, we will have a huge deficit. Implementation is the key,” points out Dinesh Kanabar, CEO of Dhruva Advisors LLP.

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Rs 13 lakh cr Estimated Value Life Insurance Corp

Rs 51,000 cr Bonus to policyholders Paid in 2019-20

70% Market Share In India’s Life Cover Space

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The Unfolding

1 February 2020 Government announces intention to float IPO

5 February 2020 Union stages strike against decision

7 February 2020 LIC Chairman MR Kumar clarifies stake sale is not privatisation; FM says IPO to bring in retail investors

22 August 2020 SBI Capital Markets and Deloitte Touche Tohmatsu hired as pre-IPO transaction advisors

16 November 2020 Centre floats global tender to engage an actuarial firm to estimate value* of LIC

31 December 2020 Milliman Advisors selected for calculating EV

1 February 2021 Budget proposes changes to the LIC Act

*Embedded value (EV), or consolidated value of shareholders’ interest in life insurance business

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Withering Ulips

With Finance Minister Nirmala Sitharaman bringing unit-linked insurance policies (Ulips) under the tax net, private sector insurers will suffer a blow to their toplines.

Earlier, participatory or non-participatory Ulips above Rs 2.50 lakh were not taxable even if they were surrendered before the maturity or on maturity. From February 1, 2021, Ulips will be taxed at 10 per cent long-term capital gains (LTCG) plus the securities transaction tax (STT) on the lines of mutual funds. The move will adversely impact higher ticket size regular and single premium Ulips. ICICI Prudential has the highest mix of Ulips at 55% (FY20). Insurers, particularly from the private sector, would now prefer to sell Ulips under Rs 2.50 lakh.

Ulips are considered as tax-saving investment instrument. Retail and high net-worth individual (HNI) investors invest in Ulips along with other tax saving instruments to ease their tax load.

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The After-effects

• LIC to follow SEBI disclosure rules

• Improved performance and better management

• Listing to boost BFSI sector and attract foreign investment

• New retail investors to hike weightage of equity market

• LIC shareholders to participate in decision making

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Protect Stakeholders’ Interest

Devi Shankar Shukla

President, Life Insurance Agents’ Federation of India, believes policyholders and agents could be affected

There are around 32 crore policyholders of LIC. They were assured that they were buying into a fully backed scheme. A government guarantee has always been the reason they trusted LIC. It’s good that the government didn’t revoke the sovereign guarantee because of the IPO.  The insurance sector was opened up in 2000. The government believed one insurer could not cover 100 crore people, and competition could bring down premiums. However, premiums have increased.

Today, 95 per cent of LIC’s profits are shared as dividend or bonus with the policyholders after paying 5 per cent to the government. If the government divests 10 per cent stake, then, 10 per cent of the profit would go to the owners and policyholders would get 90 per cent, according to the Finance Bill. That’s a decrease in policyholders’ return. It would decrease further over time as additional stakes are divested.

It may reduce interest in LIC policies, and agents may face a decline in income. Some 12 to 15 lakh people could be affected. A majority of LIC’s assets were built from premiums paid by policyholders. It earns profits from policyholders’ money. The `2,600-2,700 crore per annum dividend it pays to the government is also policyholders’ money. Is it fair to take such a big decision, to give a part of this company to the private sector, without asking those policyholders?

As told to Vishav

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Why Buy Into LIC?

• It is going to be the biggest IPO in the history of Indian primary market.
• IPOs are now making a debut at an attractive premium (at least 100%) to its issue price – a great boost for short-term investors.  
• Life insurance has tremendous potential to grow because of India’s demography.
• LIC is expected to maintain its lead position in the life insurance space, even after the IPO.
• LIC will be the largest listed company with highest M-Cap, even bigger than Reliance. The IPO will provide an opportunity to hold the share at offer price.
• India has only a 3% penetration in a market of more than 130 crore people.
• India has one of the largest protection gaps in the world. The protection gap is defined as the number of people having insurance protection are far less as compared to the number of people not having insurance protection.

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Listing May Change LIC’s Policies

Rajesh Kumar

General Secretary, All India LIC Employees Federation says listing could lead to trust deficit

Generation of employees, agents and stakeholders contributed to the growth of LIC, the only Indian company to feature among the top seven in TRA’s Brand Trust Report 2019. LIC has spread awareness of life insurance, particularly in rural areas and the backward classes, and provides them with adequate financial cover at a reasonable cost. Listing LIC may lead to a trust deficit in people’s mind.

The primary goal of LIC is to serve the public while the private sector’s goal is to maximise profit. A listing may change LIC’s approach and investment policies. It may be discouraged from providing coverage to underprivileged sections of the society. It may be pushed to review
its investments in social sectors because returns from social investments are negligible.

As told to Vishav

By Yagnesh Kansara With inputs from Nirmala Konjengbam

yagnesh@outlookindia.com