The Centre will sell a minimum 3.5% stake in Life Insurance Corporation, but the final size of the initial public offer (IPO) could be raised to 5% as proposed in the draft red herring prospectus if sufficient demand is received from anchor investors by Tuesday, sources told FE.
The insurer’s board, which met in Delhi on Saturday, approved the broad contours of the plan, subject to regulatory approval. The price band for the IPO, which will hit the market in the first week of May, “will be sub-Rs 1,000/share”, sources said.
This means the Centre could fetch between Rs 21,000 crore and Rs 30,000 crore from the issue, much lower than estimated earlier. The reduced size of the IPO and the lower valuation are prompted by feedback from institutional investors and recent capital outflows from the Indian and other emerging-economy markets following the Russia-Ukraine war. The final offer document with the actual size of the IPO, price band, discounts, reservation and issue dates will be revealed on Wednesday morning. “Subject to regulatory approval, the minimum offer size is 3.5% of LIC equity. The size may be raised to 5% in the final offer document if we get sufficient demand from anchor investors by Tuesday.” an official told FE.
With tepid demand from foreign investors in view of the rising inflation and interest rate scenario and “India’s stance on Ukraine crisis,” the IPO is largely banking on domestic institutional and retail investors, the sources said. With weak demand for foreign institutional investors, the Centre has reconciled to a much lower valuation of Rs 6 trillion for LIC, though the state-run insurer was seen as worth around twice that amount by its owner in the Budget estimate for FY22. The valuation of the insurance behemoth is 1.1 times its embedded value of Rs 5.4 trillion.
With the current set of approvals from the Sebi, LIC can bring the IPO before May 12. If it is delayed beyond this date, the estimated EV, as shown in the draft red herring prospectus, will have to be reviewed. If the IPO is delayed , the market condition may also be more unfavourable in the rising interest rate scenario also.
Besides Ukraine war and interest rate hikes by the US Fed, domestic fuel price hikes and inflationary pressures have contributed to the capital outflows from India in recent months. To offer a less than 5% stake in LIC, the government will need a special dispensation from the market regulator as the norms require large companies with a market capitalisation of over Rs 1 trillion to dilute at least 5% stake in an IPO.
Despite FPIs pulling out money from Indian and other emerging markets due to lower risk appetite, the government has decided to go ahead with the LIC IPO as it did not want to disappoint domestic retail investors, who it feels have been eagerly waiting for the issue. The LIC IPO, originally scheduled for March, 2022, got delayed due to market volatility after the Ukraine-Russia war broke out.
LIC has reserved 5% and 10% of the issue for its employees and policyholders, respectively. The insurer is likely to offer a discount to these two categories of investors after it sets the price band in consultation with the book-running lead managers. Net of these two categories, 35% is set aside for retail investors while 50% is for qualified institutional buyers and 15% for non-institutional investors. Foreign institutional investors would be part of the QIB portion.