Government to offload 5 per cent in LIC, DRHP filed with SEBI

The Union government may mop up ₹1-lakh crore from the Life Insurance Corporation of India (LIC) IPO going by the details of embedded value in the Draft Red Herring Prospectus ( DRHP), which was filed with Securities and Exchange Board of India (SEBI) on Sunday evening.

The DRHP has pegged the Indian Embedded Value ( IEV ) — a measure of future cash flows in life insurance companies, and the key financial gauge for insurers — at around ₹5.40-lakh crore. Taking the a multiple of four on the IEV, market valuation could be ₹21.6-lakh crore.

On this basis, the government could easily get over ₹1-lakh crore from LIC IPO.

The government plans to sell 5 per cent of its holding in LIC through the IPO, aggregating to 31.62 crore shares, 35 per cent of which will be reserved for retail investors who put up bids of up to ₹2 lakh . Ten per cent of the offer is reserved for policy holders and 5 per cent for employees.

“The DRHP (Draft Red Herring Prospectus) of LIC IPO has been filed today with the SEBI (Securities and Exchange Board of India),” Tuhin Kanta Pandey , Secretary in the Department of Investment and Public Asset Management ( DIPAM ), said in a tweet posted late in the evening.

Once the regulator gives its final observation, the insurance major nation largest insurer will announce the date of the issue and the price. It is expected that the issue will hit the market next month.

DRHP has pegged the Indian Embedded Value ( IEV) — a measure of future cash flows in life insurance companies and the key financial gauge for insurers — at around ₹5.40- lakh crore. On the basis of this and taking the multiple of four, market valuation could be ₹21.6- lakh crore. On this basis, the government could easily get over ₹1-lakh crore from LIC IPO.

“The Offer has been authorised by resolution of our Board dated February 11, 2022. The Draft Red Herring Prospectus has been approved by our Board pursuant to a resolution passed on February 13, 2022. The Selling Shareholder, through its letter dated February 11, 2022 conveyed its approval for the Offer for Sale of up to 316,249,885 (31.62 crore ) Equity Shares,” the DRHP said.

Allocation of shares

The DRHP has mentioned that not more than 50 per cent of the Net Offer shall be available for allocation to QIBs . However, 5 per cent of the QIB Portion (excluding the Anchor Investor Portion) shall be available for allocation proportionately to Mutual Funds only. Mutual Funds participating in the Mutual Fund Portion will also be eligible for allocation in the remaining balance QIB Portion (excluding the Anchor Investor Portion). The unsubscribed portion in the Mutual Fund Portion will be available for allocation to other QIBs.

Further, it said that not less than 15 per cent of the Net Offer or the Net Offer less allocation to QIB Bidders and RIBs shall be available for allocation to non-institutional bidders or high net-worth individuals (HNI) while not less than 35 per cent will be for retail investor i.e ., those who are putting the bid up to ₹2 lakh .

“The Employee Reservation Portion shall not exceed 5 per cent of our post-Offer Equity Share capital. The Policyholder Reservation Portion shall not exceed 10 per cent of the Offer size,” the document said while clarifying that discount may be given to these two categories.

Talking about eligibility for the offer, the document said that LIC has net tangible assets of at least ₹30 million, calculated on a restated and consolidated basis, in each of the preceding three full financial years, i.e., as at and for the financial years ended March 31, 2021, March 31, 2020 and March 31, 2019. It has an average operating profit of at least ₹150 million, during the preceding three full financial years with operating profit in each of these preceding three financial years. “Our corporation has a net worth of at least ₹10 million, in each of the preceding three full financial years,” the document said.

Entire mobilisation from the proceed will go the government. This disinvestment is critical as the government so far during FY21-22 has collected just over ₹12,000 crore through OFS (Offer for Sale through Stock Exchanges), Employee OFS and Strategic Disinvestment, while the government has revised the target for disinvestment to ₹78,000 crore against budget estimate of ₹1.75- lakh crore.

This disinvestment is also important to achieve the revised fiscal deficit target of 6.9 per cent.