LIC’s mega IPO is highly unlikely in FY21; here’s why

Mumbai: The chances of Life Insurance Corporation of India’s (LIC) initial public offer (IPO) hitting the market in financial year 2021 is very low, given a slew of challenges, including valuation-related and legal challenges, says Macquarie Capital Securities.

“Even the IPO of SBI Life, which is a far simpler organisation, took 9-12 months to prepare the embedded value (EV)/valuation report and get approvals, etc. Therefore, we believe the chances of an IPO in FY21 are very low,” Macquarie analysts noted.

They pointed out that apart from legal challenges of amending the LIC Act and converting LIC to a company under the Companies Act, the biggest problem is that in the case of LIC, the entire surplus is in the form of 95:5 – 95 per cent for policyholders and 5 per cent for shareholders.

“So even if there is a surplus from non-PAR (no-participating) or ULIP or protection book (a small proportion of total overall book), everything is transferred to one common book and shared 95:5,” they said.

“This is unlike in the private sector where only PAR policies have a 90:10 ratio and the rest is attributable to shareholders. So, if the government wants to list LIC, then they have to create three separate categories/funds - the traditional PAR book, non-PAR book and shareholders’ funds,” they added.

To extract value, they need to divide the surplus in such a way that the benefits illustrated to the PAR policyholders are maintained and the rest of the surplus is transferred to the shareholders’ account after assuring that in the non-PAR book there are enough assets to take care of liabilities, the analysts said.

The valuation and capitalisation related challenges are not simple either.

Theoretically, the EV could only be the present value of 5 per cent of the surplus attributable to the shareholders, and that number is very low at Rs 20,000 crore to Rs 25,000 crore, they said.

“Now this doesn’t include the MTM (marked to market) on the massive real-estate properties that LIC owns and huge unrealised gains on the G-sec and equity book, which is an element of uncertainty,’ they added.

Earlier this month, Finance Minister Nirmala Sithamraman unveiled plans for next financial year’s IPO, which is going to be a key component in the government Rs 2.1 lakh crore revenue target to be raised from sale of public assets and equity holdings in various public sector enterprises.

Last week, a government official said the government would soon set up an inter-ministerial group to look at the listing of LIC. He said the stake dilution is unlikely to be more than 10 per cent.

An inter-ministerial mechanism formed among department of financial services, Department of Investment and Public Asset Management (DIPAM) and law will work on various parameters of the IPO, Finance Secretary Rajiv Kumar said, adding that the government was aiming to float the IPO in the second half of FY21.