Delhi News

Govt keen, but some regulators raise concerns on LIC IPO timing

EVEN As the Department of Investment and Public Asset Management (DIPAM) is learnt to be keen on launching the LIC initial public offering in March 2022 to meet its revised disinvestment target for the current fiscal, some key regulatory sector officials have been advocating against the move, citing low percentage of policyholders having PAN linked to their policies and even lower numbers having demat accounts. There are also fresh concerns over geopolitical developments in Russia-Ukraine and its impact on markets, FPI outflow over the last couple of months, volatility in markets and March not being a right month for a large public issue.

Atleast two key officials indicated that the timing could be inopportune for the LIC IPO on account of several factors.

“The main concern comes on account of policyholders. While there are close to 30 crore LIC policyholders, less than 4 crore have their PAN linked to their policies. Even lower numbers have Demat accounts. Though LIC has been pushing its policyholders to link their PAN with their policies and policyholders to open Demat accounts, we are not sure if enough has happened on that front,” said one source. He added the current market volatility also does not augur well for a large issue.

Another official who did not wish to be named cited the overall weakness in the market and sharp outflow of FPIs as another reason for not coming out with the LIC IPO now. Over the last two months, FPIs have pulled out a net of over Rs 64,461 crore. “Generally, March is not a good time for a large issue as companies have to file their advance taxes and so the liquidity is low in the market. Also, while the market has been weak over the last couple of months and FPIs have pulled out large sums of money from Indian equities, the recent geopolitical concern comes as a fresh concern,” he said.

He added when you come out in a choppy market with a large issue, “you not only run the risk of undersubscription but also are not in a position to command a good price or premium and hence would lower your realisation. You should not come with the IPO just because you want to achieve the disinvestment target for the year. I don’t think that would be the right call,” said the official.

LIC is expected to raise around Rs 60,000 crore from its public issue. Last week, LIC Chairman MR Kumar had expressed his keenness to launch the IPO in the current fiscal itself. “We are watching the geopolitical developments very closely. We are keen on listing in March,” Kumar said last week, referring to the market volatility and developments in Ukraine.

However, the final decision on the IPO launch will be decided by the government in consultation with the investment bankers and LIC. On February 24, the Sensex crashed by 4.7 per cent (2,702 points) when Russia invaded Ukraine but recovered partially by 2.44 per cent (1,329 points) the next day. As the markets are likely to remain volatile in the coming days, any further steep fall can impact the IPO pricing.

Meanwhile, government departments and other stakeholders have been preparing the grounds for the public issue to be launched in March.

On Thursday, index maintenance sub-committee of NSE Indices Ltd decided to relax the eligibility criteria of Nifty equity indices, reducing the minimum listing history of constituents from three months to one calendar month. While the changes will be effective from March 31, market sources say the relaxation will pave the way for the inclusion of Life Insurance Corporation (LIC), which plans to list its shares in March, in the benchmark Nifty 50 Index after a month of its listing.

In another move, the Union Cabinet on Saturday cleared an amendment to the FDI policy to allow foreign direct investment (FDI) up to 20 per cent under the “automatic route” in the state-owned Life Insurance Corporation. “The change in FDI policy is sufficient to facilitate foreign investment in LIC up to 20 per cent,” said a government official, noting that an amendment to the LIC Act, 1956, was not required. According to the offer document, as much as 50 per cent of the IPO will be allocated to qualified institutional investors (QIBs). It has allocated 5 per cent of the offer for employees, 10 per cent for eligible policyholders and 35 per cent for retail individual borrowers (RIBs).

Bankers are expecting a good response from QIBs and retail investors. Investment banking sources said once Sebi approves the issue in the coming days, the IPO will open for subscription in March second week and trading will commence by the third week of March 2022 as per the current plan.

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Delhi News

Towards another milestone in the disinvestment journey

The ongoing financial year will be a rather singular one for the disinvestment story, with two big tickets having seen the light of the day. This will be a good booster for the government as it embarks on its journey to divest its stake in other companies too. One thing that is certain is that in another five years the structure of PSUs is likely to be different with only those of national importance remaining with the government.

The LIC flip-flop — will it occur or not — had riddled the markets for the last three months. But the fact that markets are down today is significant and probably not expected. The sudden focus on what the US Federal Reserve will do now is driving the markets down. Normally, good news on the US economy should be applauded by the markets. But this time, it means that interest rates will be increased, which implies that foreign investment flows will ebb to emerging markets and this, in turn, will affect the external account. Add to this the Ukraine crisis. A wobbly stock market is normally not the best time for new issuances in the market, especially of the size of LIC.

The government is determined to complete this disinvestment and the budget speech has stated this intent. With the Draft Red Herring Prospectus (DRHP) being filed, it is only a matter of time before the offer for sale (OFS) will be floated. Doing it with the Sensex below 58,000 is quite different when the markets are above 60,000. But, clearly, this is not a consideration. The intrinsic value of the company is just too good and should challenge conventional thinking. The questions that are now being raised pertain to the pricing of the issue. Merchant bankers will have to ensure that there has to be enough left for the investors to look forward to in terms of gains once they buy these shares.

The other important issue that will keep coming up is whether the LIC disinvestment will be a habit or a one-time affair. This is important because as the percentage of disinvestment increases, the free-float will increase, which will add buoyancy to the scrip price. On the other hand, if it is kept low, interest may be limited with time. Also, investors will be looking to see if the government eventually goes below the 50 per cent mark because there would be heightened interest if this is indicated. Finally, with this issue, the composition of the shareholders would be interesting as some of the other large insurance players can take some interest in LIC.

The only apprehension in the market today is public appetite. As this comes right at the end of the year when there has been a tidal wave of IPOs, which were of great investor interest, will there be enough funds left for LIC considering that for all practical purposes, it is a PSU? Besides, the upside to a LIC stock will be steady and not volatile, unlike the start-ups that have either made investors millionaires or bankrupted them with equal probability. Maybe this is a reason why a smaller than targeted number of shares may be offered.

An implication of this IPO, though not spoken of much, is that once listed, the company has to be run more on commercial lines. LIC has always been known to be the investor of last resort, intervening in the market to minimise volatility. It has also been proactive in ensuring that several disinvestment plans of the government fructify by becoming the buyer. This will not be easy in the future as investors will be looking closely at all such investments when evaluating the company.

The other victory for the government has been Air India where everyone seems happy. The government is glad to have the airline off its hands, given that it was adding losses of around Rs 20-26 crore a day. Hence, any deal was better than no deal. It can also take credit for finding a formula that worked for divesting completely a company that was hard to run or give up. Thus, these two endeavours can serve as templates to be followed for companies that fall in either of these categories — fully government-owned and heavy loss-making units.

It is often stated that the government is not in the business of doing business and hence should be out of PSUs. The genesis of the concept of PSUs was when socialistic ideals were pursued and it was felt that the government had to be everywhere. The objectives of employment and price control were met by having these undertakings. There are winds of change in the thinking today where the government would not like to carry the baggage from the past. Besides, pricing has been left open to market forces and even products like petrol and diesel are driven by the market. There is hence less reason for the government to be involved. On the other hand, it may be argued that once the government is fully out, it may mean losing control over a sector where there could be cut-throat market tactics that could militate against the consumer.

As we have embarked on this journey of privatisation, it would probably be worth considering earmarking such funds for either capex or capital infusion into enterprises that require such help. Money is fungible and one never knows how the money earned is spent as it all enters a pool. It may be time to keep disinvestment proceeds outside the budget so that there is better targeting and evaluation of such funds. A thought worth pursuing.

The writer is Chief Economist, Bank of Baroda and author of Hits & Misses: The Indian Banking Story. Views are personal

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Delhi News

LIC IPO: DIPAM shortlists Cyril Amarchand Mangaldas as legal advisor

The listing of LIC will be crucial for the government in meeting its disinvestment target of ₹1.75 lakh crore for 2021-22 (April-March)

The government has shortlisted Cyril Amarchand Mangaldas for giving legal advice on upcoming mega IPO of India’s largest insurance company LIC, an official said.

Four law firms — Crawford Bayley, Cyril Amarchand Mangaldas, Link Legal and Shardul Amarchand Mangaldas & Co — had made presentations before the Department of Investment and Public Asset Management (DIPAM) on September 24.

Following presentations, Cyril Amarchand Mangaldas has been selected as legal advisor for the initial public offering (IPO) of Life Insurance Corporation (LIC), the official told PTI.

DIPAM had first floated RFP on July 15 inviting bids from legal advisors for the mega IPO and the last date for bidding was August 6.

However, the RFP did not receive sufficient response. Following that, on September 2, it issued a fresh RFP and set September 16 as last date for bidding.

Those put in bids made presentation before DIPAM on September 24. Ten merchant bankers have already been selected for managing the IPO, touted to be the largest in country’s history. The selected names include Goldman Sachs Group Inc, JPMorgan Chase & Co, ICICI Securities Ltd, Kotak Mahindra Capital Co, JM Financial Ltd, Citigroup Inc and Nomura Holdings Inc.

The government aims to come out with the IPO and subsequent listing of Life Insurance Corporation on the bourses in the January-March quarter of 2022.

The government is also mulling allowing foreign investors to pick up stakes in country’s largest insurer LIC.

As per SEBI rules, foreign portfolio investors (FPI) are permitted to buy shares in a public offer.

However, since the LIC Act has no provision for foreign investments, there is a need to align the proposed LIC IPO with SEBI norms regarding foreign investor participation.

The Cabinet Committee on Economic Affairs had in July cleared the initial public offering proposal of Life Insurance Corp of India.

The ministerial panel known as the Alternative Mechanism on Strategic Disinvestment will now decide on the quantum of stake to be divested by the government.

“The potential size of the IPO is expected to be far larger than any precedent in Indian markets,” the department had said.

The listing of LIC will be crucial for the government in meeting its disinvestment target of ₹1.75 lakh crore for 2021-22 (April-March). So far this fiscal, ₹9,110 crore has been mopped up through minority stake sales in PSU and sale of SUUTI stake in Axis Bank.

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