Listing of India’s largest insurer LIC expected to support government’s efforts to cut budget deficit
▶ Scaled-down IPO is expected to attract many first-time stock market investors, writes Rebecca Bundhun in Mumbai
India’s biggest initial public offering will open tomorrow for retail and other investors as the government pushes ahead with the sale of a stake in Life Insurance Corporation, despite market conditions being dampened by Russia’s war in Ukraine.
The IPO, which is expected to raise up to $2.7 billion – less than half the amount that was initially expected from the listing – will generate much-needed funds for the government to narrow its budget deficit.
“It is an important event for capital markets, as well as for the government of India,” says Mitul Shah, head of research at Reliance Securities. “The government wants LIC to be a long-term value creator in the equity market, and it would support the government to get a sizeable amount from its disinvestment plan.”
In March, the government announced plans to offer a 5 per cent stake in the company. It later delayed the process and scaled it down to 3.5 per cent due to weaker market conditions. It will sell 221.4 million shares at a price between 902 Indian rupees ($11.78) and 949 rupees each.
Analysts have described the LIC stake sale as India’s Saudi Aramco moment. The oil company listed its shares on the Tadawul stock exchange in 2019 and raised $29.4bn – making it the world’s largest IPO at the time.
The LIC IPO, which opened to anchor investors yesterday, will end next week on Monday. Ten per cent of the shares have been set aside for LIC policyholders, who will be given a 60-rupee discount on the offer price.
The IPO is expected to be India’s largest and is set to overtake the 183bn-rupee listing of digital payments company PayTM, which made its debut on the BSE stock market and the National Stock Exchange, both in Mumbai, in November.
Despite being one of the country’s most eagerly anticipated IPOs, shares in PayTM are down more than 70 per cent on their listing price amid investor concerns about the FinTech company’s path to profitability and the stock being overvalued.
However, interest in the listing of India’s largest life insurer is robust, analysts say.
“Demand for the LIC IPO seems reasonable, with most investors citing it as an opportunity,” says Mr Shah.
“Moreover, additional discounts to policyholders and retail investors make it lucrative for them.”
Established in 1956, LIC has 280 million policies and is the world’s fifth-largest insurer.
“It is synonymous with insurance in India and the public has a great deal of trust in the institution,” says Kanika Agarrwal, co-founder and chief investment officer of Upside AI, an Indian FinTech company.
The listing is expected to attract many first-time stock market investors as the brand has resonance with “the common man”, said Varun Sridhar, chief executive of investment platform PayTM Money.
“It is a milestone event for Indian capital markets and is expected to bring millions of new investors,” he says.
The listing will also bring potential benefits to LIC’s operations and performance, says Ms Agarrwal of Upside AI.
“It will mean higher transparency as it will not only have to answer to the government, but also to investors and exchanges,” she says. “This will improve the quality of corporate governance.”
However, the critical motivation behind the IPO is that it would help to raise a substantial amount of money for the Indian government, whose finances took a hit as a result of the coronavirus-induced slowdown, Ms Agarrwal says.
More recently, higher crude oil prices due to Russia’s invasion of Ukraine have taken a toll on the economy as India imports 85 per cent of its oil requirements.
“Even in the current year, government is struggling to meet its disinvestment targets; getting the LIC IPO done will be a huge step in a positive direction,” says Ms Agarrwal.
In the past financial year, the government sold off loss-making Air India to Tata. The airline had been considered an enormous drain financially.
New Delhi has set a fiscal deficit target of 6.4 per cent of gross domestic product for the current financial year, which runs until the end of March, and the LIC issue is aimed at helping it to meet this target.
“The listing of LIC is part of the long-term strategic vision of the government and will be high-value enhancing for LIC in the long run,” Tuhin Pandey, secretary of India’s Department of Investment and Public Asset Management, said last week.
“This is right-sized, considering the capital market environment. We expect significant retail participation.”
It was a bumper year for IPOs in India in 2021, and a record amount was raised. However, the shares of a number of start-ups that listed last year, including fashion and beauty e-commerce company Nykaa, which was founded by Falguni Nayar, and insurance comparison website PolicyBazaar, have declined in value.
Given the challenging environment and current investor sentiment in global markets, the decision to lower the issue size and valuation is a prudent step, says Ms Agarrwal.
“If it had continued with its initial plan, the IPO could have been a tough sell. But now, it seems to be fairly priced.”
Foreign investors have been pulling money out of India in recent months, with rising inflation forcing the US Federal Reserve in March to tighten its monetary policies and increase interest rates by 0.25 per cent.
However, there are high hopes that the LIC IPO will attract a wave of foreign and domestic investors alike.
“Being a landmark issue for the nation, LIC is expected to be pinned on global portfolio watch lists,” says Shivam Bajaj, founder and chief executive at Mumbai-based Avener Capital.
Analysts say that the insurance sector is only set to grow and the LIC IPO is an attractive opportunity.
“India’s insurance penetration is only 3 per cent and, hence, this is clearly a sector with great growth potential,” says Ketan Dalal, managing director of Mumbai advisory company Katalyst.
“Its brand dominance and vast network of over one million active agents makes it a truly formidable player in the life insurance segment.”
However, the company is also facing challenges such as increased competition from private insurers, many of which are effectively using technology to win customers, which has led to LIC losing a share of the market, he says.
“Private players have been aggressive in their pricing and grabbed a big chunk of the pie,” says Anoop Vijaykumar, fund manager and head of research at Capitalmind.
“LIC’s market share had come down. We may continue to see this trend ... in the future as well.”
Nevertheless, the IPO is “attractive” even though “the current market sentiment is weak and the IPO euphoria has subsided” after several listings in India last year, Mr Vijaykumar says.
Mr Dalal agrees. “LIC will face several challenges in terms of product innovation, technology, management stability and many other dimensions,” he says.
There have also been some concerns among investors that the government’s role in LIC could influence the company’s investment decisions, but analysts are optimistic that the listing will ensure accountability.
“In any case, the IPO will lead to significant transparency and accountability of the behemoth that LIC is – and that is a very good sign of the move towards privatisation and accountability,” says Mr Dalal.