India government moves ahead with LIC IPO plans
As many as 16 Merchant bankers are in a race to manage the much-awaited mega IPO of Life Insurance Corporation of India this year. The LIC IPO is a much anticipated and mega listing for FY 2020-21, and is a push forward towards the Indian government’s disinvestment plan.Courtesy: Reuters

India government moves ahead with LIC IPO plans

ANALYSIS

India’s Maharatna PSU is one of the crown jewels of the public sector. The GoI will be careful not to allow control of the insurer to pass substantially into the hands of foreign investors. The 74 per cent FDI ruling may not apply to LIC as it is a company that was created by an Act of Parliament and so, is subject to several special rules and privileges.

Even as the government works on listing the Life Insurance Corporation of India (LIC) it has amended a key rule to facilitate its earlier decision of allowing foreign investors to hold up to 74 per cent stake in insurance companies.

It has amended the Foreign Exchange Management (non-debt instruments) Rules, 2019 to increase the foreign direct investment (FDI) limit in insurance companies to 74 per cent, up from 49 per cent earlier.

The LIC IPO and the amendment to the Fema rules are unrelated as the government has no plans of diluting its stake in India’s largest insurance company by that much.

However, the government is seriously considering allowing FDI in LIC’s mega IPO that is likely to hit the market by the end of the year or early next year. LIC is a Maharatna PSU, one of the crown jewels of the public sector, and so, the government will be careful not to allow control of the insurer to pass substantially into the hands of foreign investors.

The rules allowing up to 74 per cent FDI in insurance companies may not apply to LIC as it is a company that was created by an Act of Parliament and so, is subject to several special rules and privileges.

The government is seriously considering allowing FDI in LIC’s mega IPO that is likely to hit the market by the end of the year or early next year. LIC is a Maharatna PSU, one of the crown jewels of the public sector, and so, the government will be careful not to allow control of the insurer to pass substantially into the hands of foreign investors.

So, there will certainly be a cap on FDI, but the exact limit is still under consideration. According to the Reserve Bank of India (RBI), FDI is defined as the purchase of a stake of 10 per cent or more by one foreign investor. It may be noted that the FDI limit in public sector banks is capped at 20 per cent.

16 i-banks in fray to manage mega listing

Meanwhile, as many 16 domestic and international I-banks are pitching for the mandate to manage what will be India’s largest-ever IPO. These include well known names such as Goldman Sachs (India) Securities, JP Morgan India, Citigroup Global Markets India, Nomura Financial Advisory and Securities (India), DSP Merrill Lynch (now known as BofA Securities), HSBC Securities & Capital Markets (India) and BNP Paribas.

Among the Indian contenders are SBI Capital Markets, HDFC Bank, ICICI Securities, IIFL Securities, JM Financial, Axis Capital, Kotak Mahindra Capital Co, Yes Securities India and DAM Capital Advisors.

These presentations, made over August 24 and August 25, to officials of the Department of Investment and Public Asset Management (Dipam), who will finally select 10 book running lead managers to handle the IPO.

As many 16 domestic and international I-banks are pitching for the mandate to manage what will be India’s largest-ever IPO. These include Goldman Sachs, JP Morgan, Citigroup Global Markets, Nomura Financial Advisory and Securities, SBI Capital Markets, HDFC Bank, ICICI Securities, IIFL Securities, JM Financial and Axis Capital, among others.

Divestment proceeds key to meeting fiscal deficit target

The government, which currently owns 100 per cent in LIC, is looking to sell a part of this stake in the company to raise funds to bridge the fiscal deficit of 6.8 per cent of GDP. This year, Finance Minister Nirmala Sitharaman has budgeted for receipts of more than $23 billion from the disinvestment of public sector companies.

Of this, experts estimate more than half could come from LIC, which has been valued by Jefferies India at $261 billion, easily making it India’s most valuable company.

The JP Morgan Chase & Co corporate headquarters in New York City. The firms Indian arm is one among 16 domestic and international I-banks that are pitching for the mandate to manage what will be India’s largest-ever IPO with LIC.
The JP Morgan Chase & Co corporate headquarters in New York City. The firms Indian arm is one among 16 domestic and international I-banks that are pitching for the mandate to manage what will be India’s largest-ever IPO with LIC.Courtesy: Reuters

60 per cent of Indian insurance business with listed companies

After the listing of LIC, as much as 60 per cent of the Indian insurance business will be with listed companies, said Amit Agarwal, Additional Secretary in the Ministry of Finance.

The government owns 100 per cent in LIC and is looking to sell a part of this stake to raise funds to bridge the fiscal deficit of 6.8 per cent of GDP. This year, Finance Minister Nirmala Sitharaman has budgeted for receipts of more than $23 billion from disinvestments. Of this, more than half could come from LIC, which has been valued by Jefferies India at $261 billion.

A PTI report said: “According to Amit Agrawal, the public listing of LIC is part of India’s continued efforts to develop the country as an emerging economy with a deepened and achieved scale of economic stability. He pointed out that the Indian insurance business sector has matured over the two decades since the introduction of competition and regulation. Agrawal pointed out that the sector now has 69 insurers as compared to eight back at the start of the century.”

The Cabinet Committee on Economic Affairs (CCEA) has granted in-principal approval to the listing of LIC. The exact quantum of stake to be divested and the date of the issue are, however, still to be decided.

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