Explained | What must LIC IPO investors keep an eye on?

Will regulatory requirements, competition, COVID-19, Government retaining majority control impact the company?

The story so far: The Life Insurance Corporation of India (LIC) filed its draft red herring prospectus with capital markets regulator SEBI last Sunday. Going by the importance of the proceeds for the Centre to meet this fiscal’s disinvestment targets and reports citing unnamed official sources, the IPO is likely to hit the market in the first half of March. With the Government planning to sell 5% of its 100% stake in the insurer, market participants expect the IPO to raise at least about ₹60,000 crore for the exchequer.

A prospective investor must first take note of the fact that with an Offer for Sale of up to ₹31.62 crore equity shares by the Government, the IPO's main objective is to achieve the benefit of listing LIC's shares on stock exchanges. As the stake belongs to the promoter (Government), LIC will not receive any proceeds from the share sale. Instead, the Government will be entitled to the entire proceeds after deducting the offer expenses and relevant taxes. The main types of risks that could impact LIC and as a result shareholder returns relate to regulatory requirements, competition, the pandemic effect, the Government still retaining majority control, as well as specifics such as the segregation of its single consolidated ‘Life Fund’.

The sole state-owned player and market leader in life insurance has pointed to the exhaustive and complex laws, regulations, rules and guidelines, issued from time to time by the Insurance Regulatory and Development Authority of India (IRDAI) and other regulatory/statutory/governmental authorities in India, that govern its operations. These include investment restrictions; issuance of capital; foreign investment restrictions; solvency ratio requirement; restrictions on place of business; approval for appointment and remuneration of certain key managerial personnel and the remuneration guidelines; limit on commission or remuneration to agents and insurance intermediaries; regulations for unit-linked and non-linked insurance products; as well as obligations to rural and social sectors. Also, LIC is a domestic systemically important insurer, in other words an insurer that is considered too big to fail, and hence subjected to enhanced regulatory supervision.

Though becoming a listed entity is bound to pave the way for more disclosures, LIC’s management control would indirectly remain vested with the Government. This could prove both beneficial, especially in attracting prospective policyholders, as well as hurt the insurer since it would end up still lacking the operational flexibility that private competitors have.

LIC has also pointed to how the increase in the FDI limit in insurance to 74% (from 49%) could result in new entrants, better capitalisation of existing competitors and a general increase in the level of competition. While increased competition may lead to overall growth, it may also adversely impact its market share, margins, growth in new business premiums and customer acquisition.

A monopoly until India opened up insurance to private players at the turn of the millennium, LIC continues to be the largest insurer, with a vast network of offices, an army of agents, commanding a 66% market share in terms of new business premium, accounting for 75% of the number of individual policies issued, and having an 81% share in the number of group policies issued for fiscal 2021.

What this also reflects is that the private players —23 at present— have been nibbling away at the pie.