The LIC IPO Game Plan

05 Mar, 2021

7 min read

4457 Views

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IPOs have attracted overt attention of retail and institutional investors alike in the recent Indian stock market scene.

Last year, when the pandemic had driven Sensex down by over 34 percentage points compared to its pre-lockdown levels, a strong recovery ensued and many new names went public. In India, some of the biggest issues have been made by DLF, Reliance Power, Cairn India, and ICICI Prudential Life Insurance. But no one has ever witnessed what is about to take place in the stock market in 2021 - and that is, Life Insurance Corporation of India going public as a part of the government’s systematic divestment from some of its holdings.

Some of the experts are calling this IPO the mother of all IPOs in the Indian stock markets, while others have referred to the highly anticipated event as a mega listing - no matter what you call it, special provisions are being made to facilitate a smooth listing process, with some new rules being introduced to inject fairness and to set the expectations right. Let's check out some of the highlights, and major points that you need to keep in mind as the market gears up for this event.

The Securities Exchange Board of India has made some changes in its listing rulebook to accommodate the sheer size and to accommodate a company with a market capitalization as gargantuan as LIC’s. Basically, the SEBI has said that the issuer will now have to offer 10000 crore and 5% of the amount above 1,00,000 crores. So what will the IPO size be according to this directive? Let’s find out.

According to market analysts, the valuation of LIC stands between 8-15 lakh crores. Although most are still busy doing the math, we can still make a conservative estimate to understand the scale of this offer. If the market valuation stands at 8,00,000 crores, then LIC’s offer size will stand at Rs 45,000 crores. But if the upwards estimate is more accurate, then the offer size could be as high as Rs. 80,000 crores. As you can see, this IPO will trump all the other IPOs that have taken place until now, and will be the biggest offer this year - and for many years to come. In fact, some experts have even said that an IPO of this size will absorb a significant amount of liquidity from the economy.

Alright, we got the issue size down, but when is this issue going to be made, and how much will be offered for which categories? The Finance Minister had indicated earlier during the budget announcement that the IPO will take place in FY 2021-22 for sure. But the Department of Investment and Public Asset Management (DIPAM) has indicated that the IPO will take place around the third quarter of the year - meaning somewhere in October 2021. That’s right - not a lot of time left. Then let’s review the offer size by categories.

An interesting provision in this IPO will basically entitle the current LIC policyholders to 10% of the total issue size. So if the issue size is around 55,000 crores, this provision will entitle LIC policyholders to 5,500 crores of the total issue. In this process, many new demat accounts are likely to be opened - because to subscribe to the issue, the policyholders will have to have a demat account. Currently, there are almost 4.5 crore demat accounts in India - by the end of this year, LIC’s issue alone is expected to contribute to 1 crore additional demat accounts. 

Now comes the last and the biggest question at hand - should you subscribe? While it is too early to make a conclusive remark - because market conditions are always changing and evolving over time, there are some observations that can be made. In the recent past, two general insurance corporations have gone public - namely, GIC Re and NIA Co. Ltd. Both of these offers have been disappointing to subscribers. NIA shares were introduced in the price range of Rs. 770-800, but is currently trading at Rs. 159 (at the time of writing.) On the other hand, GIC Re’s shares were introduced at Rs. 912, but are currently trading at Rs 197(at the time of writing.) But having issued bonus shares for shareholders that continued to hold within a specific time frame after the issue, the losses don’t look as steep as these numbers might suggest - or is it so? Even if you had subscribed to the NIA IPO, you have purchased each share at Rs 770, while currently holding Rs. 318 worth of shares for the same as a result of issuance of bonus shares. That’s still a steep loss of 58%+. GIC’s subscribers, on the other hand, stand at a 56% loss. 

However, most are expecting something different from LIC, simply due to the sheer size and market capitalization of LIC in india. In fact, some have pointed out that even a marginal increase in the productivity of LIC’s workforce will result in notable growth and revenue boosts for the company. LIC currently employs 22 lakh agents - and if each agent were to sell one additional policy every year, then the company could see a massive boost in sales volume. We suggest that you take a more technical approach to deciding whether to subscribe or not. Looking for more knowledge on such super-avenues of investment? Then log on to our website www.angelbroking.com, and keep the learning going!

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