LIC IPO- Let the investors get a fair deal

LIC IPO- Let the investors get a fair deal

Soon India will con embarked on a major reform – the listing of Life Insurance Corporation (LIC) on the exchanges with an initial placement of about 4-5% of its equity to the institutional and retail investors. This reform has drawn a lot of attention as perhaps the first ever attempt by the government to list LIC and utilize the funds for funding the national budget. In this blog I discuss various interesting facets of this reform, its implication on the market and economy, and the expectations from the investors going forward.

India’s one of the biggest brands

LIC for several decades has enjoyed substantial brand equity and for so many years most brand equity surveys have placed LIC on the top. Truly, it is one of those institutions which can boast an unparallel and consistent contribution to the growth of economy. As we all know, the liability of the corporation arising out of the policy contracts is guaranteed by the sovereign and therefore it’s truly a household name. To my mind, this brand equity will be a major factor in the success of the IPO.

The sovereign guarantee to the corporation is an undertaking to all the policy holders on both the aspects – the protection as well as the investment (savings) undertaken under each policy contract.

The winning factors for the IPO

LIC is one of those institutions and perhaps the only one in the country with nearly 300 million contracts (no of policies) and more than 230 million policy holder’s folios. The shares of the corporation will be offered to the policy holders as we are told and if the value proposition offered and the pricing at which the equity is offered is attractive then it will have a substantial response from the policy holders. To that extent LIC could end up having a huge response from retail and small size investors who may equate this investment almost to gilt paper or to a sovereign promissory note for fair return.

The challenges and expectations

The first major challenge that the IPO could face will be the receiving and processing of the application forms till the allotment of shares. It should be properly carried out. It should be noted that it will involve creation of millions of additional demat accounts. As some people predict the number of demat accounts in the country, for the security instruments could multiply many folds. This is a nice problem to have for all the participating entities. The investment bankers will have to ensure a highly transparent and fair process is conducted.

The second challenge would be to meet with the investor expectations, based on the public information, the size of the IPO could be anywhere between Rs45 K- Rs 50 K crores. It will suck away so much liquidity from the system.

The government would, one may assume be keen on having long term investors who will benefit over longer period of time for participating in the IPO compared to some recent IPOs, and particularly those which listed and traded at the market at huge discounts questioning the reputation of the entities. Of course, there will be market risk on the investors and that would require LIC and the government to create awareness particularly for the retail investors. It will be widely accepted that the benchmarks set up by listed life insurance companies will be regularly examined by the investors. It is very unfortunate that the record of New India Assurance Company is perhaps not much to talk about when compared with the multiples to book achieved by the private sector general insurance listed companies. This could pose a serious challenge considering the huge trust element LIC enjoys.

Governance and disclosures

This IPO will cast responsibility on all the financial services regulators, particularly SEBI and IRDAI to conduct adequate surveillance and offer guidelines and regulations around disclosure. The regulations associated with creating firewalls between different categories of policy contracts to determine the actuarial surplus for each earmarked line of business will be critical. As we know presently 5% of the overall surplus each year is considered as belonging to the shareholders and balance is retained as policy holder fund. It could be raised to 10%, like it is done for private sector companies. The actuarial surplus evaluation will have to be properly disclosed. This may perhaps manifest in the investments being separately classified for different category of policy products.

The other challenge will be that retail investors would expect simple, understandable communication on their investment performance and ensure fairness and transparency in protecting their returns.

It is widely perceived that aspect of governance will be addressed by the listing of shares in the exchanges. With 4 to 5% of equity it may be too much to expect, and almost like in case of public sector banks, some half way measure of listing obligations and disclosure requirements (LODR ) may be evolved and some provisions of truly independent board members may be determined.

Conclusion

Despite all the challenges the IPO is a landmark event, as much as the nationalization of LIC some decades ago and hopefully it would be successfully completed within this calendar year.