As the government lays the groundwork and readies to seek parliamentary approval to amend the LIC Act and facilitate the mega IPO of insurance behemoth Life Insurance Corporation, market regulator Sebi has just effected some changes in the Securities Contracts Regulations 1957 to help fast-track the issue.
Reading between the lines in these regulatory actions, market watchers say the much-awaited issue may not be as colossal as anticipated, and the government might end up selling a relatively smaller portion than what the current projections are.
That’s the cue they draw from the tweaks that Sebi has just effected in the law.
What are the tweaks?
The Sebi board has lowered the need for minimum public offer size of initial public offerings from 10% of post-issue market capitalisation to Rs 10,000 crore, plus 5% of the incremental amount for issues with a post-issue market capitalisation of Rs 1 lakh crore or more.
Such issuers shall be required to achieve at least 10 per cent public shareholding in two years and at least 25 per cent within five years from the date of listing. Currently, companies approaching the IPO mart are required to offer at least 10 per cent of their post-offer equity in public offers and increase the minimum free float to 25 per cent within three years.
So, if LIC’s post-issue market capitalisation is estimated at Rs 8-10 lakh crore, then the issue size would have been Rs 80,000-1,00,000 crore as per the old rules, which can now come down to Rs 45,000-55,000 crore. Even with that size, LIC is likely to be the largest-ever IPO in the domestic market.
“The change in the MPS (minimum public shareholding) norms is very appropriate, as it would allow very large companies, like LIC, and many high-tech companies with large valuations to do a domestic offer with ease,” said Prithvi Haldea, Chairman of PRIME Database.
What does it mean for LIC?
The insurance behemoth could be India’s equivalent to Saudi Aramco in terms of valuation. The new norms of market regulator will give the government time and flexibility to test the waters for LIC, said market analysts. Media reports had earlier stated that the government may look to sell around 10-15 per cent stake in LIC through the IPO.
“It looks like the government does not want to sell a large chunk of the state-run insurer in a single shot. It wants to try and test the depth for large issues. The IPO will unlock the real value of the company,” said Rajeev R Shah, Managing Director & CEO at RBSA Advisors LLP.
Other market watchers said considering the current euphoria in the primary market and rapid surge in demat accounts, there would be ample of appetite for the LIC IPO. Gaurav Garg, Head of Research of CapitalVia Global Research said, “A Rs 45,000-55,000 crore IPO will not have any issue in sailing through as the market is brimming with money.”
Need for the tweaks
LIC is the crown jewel of India and the government owns 100 per cent stake in it. The government does not want to go wrong in this stake sale. The appointment of professional actuarial firms highlights the eagerness of the government to determine the fair valuation.
“The opaqueness of LIC’s investments in several unlisted companies, its large land holdings and investments in perennially underperforming stocks need to be addressed. One should await reports from the assigned agencies before jumping the gun,” Garg said.
“The government wants to leave something on the table for investors. A trimmed issue will leave a decent headroom,” said Shah. “However, the government does not want to undervalue the asset, as it had done in the case of IRCTC.”
Once bitten, twice shy
Even though it is unlikely that LIC’s IPO will be valued aggressively, New Delhi does not want to seek a conservative price for it. Garg of CapitalVia said the government is taking a balanced approach in selling out its assets.
One key determinant of the size and price of LIC IPO will be the huge disinvestment target the government has set for itself. The government budgeted Rs 1.75 lakh crore revenue from stake sale in public sector companies and financial institutions. Later, Prime Minister Narendra Modi set the goal even higher, saying he wants to raise at least Rs 2.50 lakh crore from disinvestment and strategic sale this year.
Nitin Mukhi, Associate Director at RBSA Valuation Advisors said historically, governments have rarely achieved their annual disinvestment targets.
Analysts say the LIC IPO is not the prime focus of the government next financial year. Instead, the goal is successful strategic disinvestment of BPCL, Air India, Concor, Shipping Corporation of India, along with that of two PSU banks and one insurance company,
A lot remains to be done
While the LIC IPO may create a lot of hype among investors when it hits the market later this year, a lot of work remains to be done. This is going to be a big move, and a bigger challenge awaits post listing, as the government is said to have often used the insurer as the ‘investor of last resort’ in its disinvestment programme. “One should wait for the composition of management and how much say the government will have post listing,” said Garg.
The IPO has the potential to give equity markets a new flavour, signaling strong and sufficient demand. Shah of RBSA advisors said the market has its own mind, which can be irrational or polarizing at different times.
Credit: Stocks-Markets-Economic Times