Selling Life Breathing Life
Outlook Money|February 2021
The largest public issue in the history of India’s capital market is expected later this year with an estimated value of ₹1 lakh crore. The LIC IPO will give the individual investor an opportunity to be part of one of the biggest and oldest brands of the country that is built solely on trust and confidence
Yagnesh Kansara

13 lakh cr Estimated Value Life Insurance Corp

51,000 cr Bonus to policyholders Paid in 2019-20

70% market share In India’s Life Cover Space

The Unfolding

1 February 2020 Government announces intention to float IPO

5 February 2020 Union stages strike against decision

7 February 2020 LIC Chairman MR Kumar clarifies stake sale is not privatisation; FM says IPO to bring in retail investors

22 August 2020 SBI Capital Markets and Deloitte Touche Tohmatsu hired as pre-IPO transaction advisors

16 November 2020 Centre floats global tender to engage an actuarial firm to estimate value* of LIC

31 December 2020 Milliman Advisors selected for calculating EV

1 February 2021 Budget proposes changes to the LIC Act

*Embedded value (EV), or consolidated value of shareholders’ interest in life insurance business

It’s saral. At 66, she would be mature enough to don a new look, and step out into the open.

LIC gets ready to go public. The Life Insurance Corporation – often a lifeline for the government in times of crunch – comes handy when the finance minister works out a ₹1.75-lakh-crore cash jab for a staggering economy. Billed to be valued at anything between ₹90,000 crore and ₹1.3 lakh crore, the maiden public issue will be the biggest in the history of the Indian capital market.

Listing LIC, a plan the ministry has been working on for over a year, comes as the obvious choice for the government to weather the rough winds after the worst marauder in human history, the COVID-19 pandemic, drove most global economies down to their knees. The toll has been such that the finance minister had to put a general insurance company also on the block along with two public lenders, and widen the door to foreign funds into the insurance sector up to 74 per cent, to fund this ₹1.75-lakh-crore capital expenditure.

While drafting her Budget for the fiscal 2021-22, Finance Minister Nirmala Sitharaman opted for selling assets, instead of slapping new taxes on the people and businesses, to secure growth for the economy. She has set 2021-22 as deadline for completing strategic divestment in public sector entities like Bharat Petroleum Corporation (BPCL), Air India, Shipping Corporation of India (SCI), Container Corporation of India, IDBI Bank, BEML, Pawan Hans and Neelachal Ispat Nigam Ltd.

Markets cheered the move and indices went on a rally on Monday. The S&P BSE Sensex surged over 3,300 points in just two sessions after the Budget was tabled. Most brokerages called the proposals “pro-growth” that will lead to a “capex-driven revival for the economy” from the COVID-19 woes.

The disinvestment overdrive of the government comes as a huge boost for the green shoots of recovery that have begun showing up since the authorities lifted the COVID containment measures. The biggest of the divestments – the initial public offer (IPO) of LIC – is expected to hit the market around October, while the government looks to complete the process for BPCL and IDBI Bank by September 2021.

According to Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey, the government has introduced the legislative amendments required for diluting its stake in LIC and IDBI Bank through the Finance Bill 2021. It has also received the preliminary expression of interest for stake sale in Bharat Petroleum Corporation (BPCL) and Air India, while the same for SCI is due on February 13.

“The LIC Amendment Act and the Amendment to IDBI Bank (Transfer of Undertaking and Repeal) Act have been made part of the Finance Bill. There will be no separate Bill. The LIC IPO would come postOctober,” says Pandey.

DIPAM, which manages the government’s equity in state-run companies, has signed up actuarial firm Milliman Advisors for ascertaining the embedded value of LIC, while Deloitte and SBI Caps have been appointed as pre-IPO transaction advisors.

Withering Ulips

With Finance Minister Nirmala Sitharaman bringing unit-linked insurance policies (Ulips) under the tax net, private sector insurers will suffer a blow to their toplines.

Earlier, participatory or non-participatory Ulips above ₹2.50 lakh were not taxable even if they were surrendered before the maturity or on maturity. From February 1, 2021, Ulips will be taxed at 10 per cent long-term capital gains (lTCG) plus the securities transaction tax (STT) on the lines of mutual funds. The move will adversely impact higher ticket size regular and single premium Ulips. iCiCi prudential has the highest mix of Ulips at 55% (FY20). insurers, particularly from the private sector, would now prefer to sell Ulips under ₹2.50 lakh.

Ulips are considered as tax-saving investment instrument. Retail and high net-worth individual (HNi) investors invest in Ulips along with other tax saving instruments to ease their tax load.

Although the finance minister did not disclose the size of the stake that would be up for grabs in the first tranche, the Finance Bill says that the government may dilute up to 25 per cent holding in LIC within the next five years but will never let its share fall below 51 per cent. The initial divestment is likely to be 10 per cent with the government keeping 15 per cent more as rain check. The public issue will keep its 10 per cent for policyholders. “There will be a 10 per cent discount for policyholders investing in the IPO,” the Bill says.

The state-run insurer is believed to be worth anything between ₹9 lakh crore and ₹13 lakh crore, according to independent valuation firm RBSA Advisors. The agency based its calculations on the market capitalisation (M-cap) as a percentage of assets under management (AUM), which is lower for LIC, compared to its listed peers like SBI Life Insurance, HDFC Life Insurance and ICICI Prudential Life Insurance. A more accurate valuation is expected when the embedded value of the insurer will be calculated.

“We are yet to see how the business gets defined once it is corporatised. The true valuation will be derived thereafter, but it will be one of the mega large caps no doubt,” bets Equirus Capital Managing Director Ajay Garg.

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