The Central government planned for disinvestments in the recent Budget to unlock the value of state-owned firms by going public. Accordingly, the target for disinvestment in the current fiscal year is an ambitious ₹2.1 lakh crore. To achieve this target, the government has placed its hope on one of the crown jewels of the public sector undertakings, Life Insurance Corporation of India (LIC). Accordingly, government has set the ball rolling by issuing a request for proposal (RFP) for engaging pre-initial public offering (IPO) transaction advisors. However, we have observed some gap in the selection process and suggest a better way of slecting the advisors.

Role of transaction advisors

LIC invited reputed investment bankers, merchant bankers, consulting firms and other financial institutions to assist the Department of Investment and Public Asset Management (DIPAM) in the preparatory processes leading to the IPO. These transaction advisors would be responsible for designing the master plan to take LIC to the public. The advisors would be required to do a preliminary study to evaluate and advise on the optimal capital structure of the firm. The advisors would also perform the early investor outreach programme ahead of the actual IPO marketing campaign to build the conversation around the IPO.

How are the transaction advisors selected? The RFP welcomes merchant bankers, investment bankers, consulting firms or financial institutions who have experience of at least three years in advisory services to come onboard. The RFP states that such institutions should have an experience of handling an IPO worth ₹5,000 crore or should have managed capital market transactions worth ₹15,000 crore from April 1, 2017 to March 31, 2020.

The applicants for LIC would be weighed on different parameters, including capital market experience in India and abroad, expertise in the life insurance business, presence in India and ability to market the IPO, and commitment from the team that would be working on this project. The highest scoring institution will be invited to handle the advisory business, and one of the subsequently ranked institutions would be asked if they would be willing to come on board at the price quoted by the highest-ranked bidder.

So, what’s the problem? The selection of the transaction advisors in this way poses difficult questions. Though this process would ensure that the two best bidders were selected based on their technical expertise, this would hardly help the cause of the IPO. As managing and advising on an IPO is a very specialised business, different firms develop expertise on different sides of it. Accordingly, we see multiple institutions collectively handling an IPO, lending their expertise to make the best case for the firm going public. Bringing two different institutions together would not necessarily mean complementarity of their abilities. It may as well lead to the overlapping of expertise of both the advisors.

Suggested alternative

The selection of the two transaction advisors could be optimised by tweaking the process with a two-stage process. When the first advisor is selected, a separate evaluation may be done by DIPAM to check which of the other bidders best complement the abilities of the chosen advisor.

Following this process, it can be ensured that both the advisors would be working in tandem with each other without overstepping on each other’s area of expertise, and be able to provide the government with an operational base where the IPO yields the best possible value for the government. Ensuring this would not only help the government to achieve its disinvestment target but also provide the investors with the best possible value from the proposed IPO.

Saravanan is Professor and Banerjee is a doctoral candidate for finance and accounting, IIM-Tiruchirappalli

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