The first chapter in the series -LICs Road to the IPO, is here.
In the previous chapter, we gave you a flavour of LIC’s massive size as well as its stature as one of India’s most recognizable brands.
LIC does not follow the same rules as other insurance players in the country. The government owns 100% of the PSU established after merging 243 companies under a parliamentary act. The government will divest around 25% of its stake in LIC to generate as much as $12bn.
The amount will help to bridge the deficit gap in FY22.
Disinvestment has not been easy, and the government hopes to list the largest insurer LIC by the end of this financial year 2021-22. With just a month left before its launch, the preparation for the public offer is in full swing.
The IPO of this insurance behemoth is daunting; harried bankers are racing against the clock to complete the mammoth task of assigning a valuation to India’s largest insurer. The government officials are burning the midnight oil to put an initial offering that will rival other public offers in Asia. LIC alerted policyholders via front-page newspaper ad campaigns and SMS titled – Be prepared.
Well, this IPO may not be as simple as putting together the DHRP and announcing the dates like other companies. The governing structure, the books, FDI, and policy structure must change before the listing.
Let us look at the changes made to ensure LIC lists successfully.
Changes to the LIC Act: After cabinet approval for the disinvestment, the LIC Act, 1956 was amended to increase the capital base before the listing. The paid-up capital of LIC was 100 crores before the amendment. The government also approved raising LICs authorized share capital to Rs. 25000 crore. The government did not receive a dividend in the last financial year as LIC used its free reserves to increase its paid-up capital to Rs. 6,325 crore.
LIC will not be renamed Company after listing: Initially, the government expected to rename LIC –Company instead of Corporation. But the change may not be possible considering LIC would like to retain its sovereign guarantee provision. As per Section 37 of the LIC Act, it is the only insurer to offer such a guarantee to its policyholders, i.e., the government guarantees every policy LIC sells. Moreover, the Companies Act 2013 does not allow for the sovereign guarantee if LIC becomes a Company.
Reorganizing the Investment book: Insurance companies have two books of accounts; the policyholder investment book and the shareholder investment book. LIC had a shareholder investment of Rs. 685 crore, while policyholder investment was Rs. 30.1 lakh crore as of Q1FY21. The consultants will reorganize the investment books to clearly define the debt and equity investments in the book, especially the ULIP portfolio that has both equity and debt investments.
LIC and the consultants SBI Capital and Deloitte are working to simplify the books to make it easier for public investors to understand the financial aspects of the insurer.
Changes in Public disclosures: Insurance companies must maintain a high degree of financial and investment book disclosures compared to other businesses. Considering the sheer size of LIC, the corporation must ensure it discloses the exact nature of its investment in listed companies, including corporate debt, downgraded investments, and the action taken against them.
LIC will now have to disclose its equity stake in all listed companies. Another IRDA mandate it has to fulfill is to outline its role in the voting process at such companies and the rationale behind the decisions.
Changes in LIC itself: The Department of Financial Services under the Finance Ministry amended LIC Employee’s Pension rules and a few other rules under the LIC Act, 1956.
The insurer always had a Chairman since its launch. It will now have a CEO and MD instead of the chairman. Yet, the government will still appoint the Chief Executive and Managing Director under section 4 of the LIC Act. The Department of Economic Affairs amended the Securities Contracts (Regulation) Rules.
Changes to the FDI policy: India currently allows FDI up to 74% in the insurance sector. But, this policy does not apply to LIC since the LIC Act governs it. The government is awaiting the Cabinet’s approval to changes in the FDI policy. The new policy will allow 20% FDI during LICs public offer. The government is the only one that can hold over a 5% stake in LIC now.
The new rule will let foreign funds invest in the mega IPO and buy more shares after listing. The regulators have made other changes like tightening rules that govern share sales by anchor investors.
LICs share-based employee benefit schemes or ESOPs will be aligned with the Companies Act to avoid contradiction with other laws.
These changes will help smoothen LICs road to the IPO. The government and LIC executives are leaving no stone unturned to ensure the initial public offer is a success. A successful listing will set the stage for listing other PSUs to fulfill disinvestment targets the government has set down in the budget.
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