Economic Undertakings

LIC’s IPO Comes With Risks Galore

Life Insurance Corporation of India (LIC), the lifeline of the Indian government, goes public. The event itself is the largest ever for the economy, stock markets and investors. By offering a 5% stake to investors – 31.62 crores of shares – the government will retain all proceeds from the IPO while raising between Rs. 60,000 and Rs. 65,000 crores from the market. If successful, it would be the biggest fundraiser of any Indian company. There is already a rush to open Demat accounts to apply for the IPO. Reports say that brokerages have already opened 34 lakh new accounts in January.

As the government bets on a mega LIC IPO to meet its budget forecast in the current fiscal year, many questions are being asked about what lies ahead for the nation’s biggest company. The first and most important is the track record of most PSU IPOs in the past. Given the continued volatility in the stock market, the fear of an IPO failure becomes more prominent.

How have PSU IPOs gone in the past

The biggest challenge before the IPO is overcoming its ownership issue. The data indicates that in most public sector companies (PSUs or SOEs), equity investors performed poorly or negatively. Of all IPOs of central government entities that have raised funds in the markets since 1999, half of the companies have produced negative returns relative to bank term deposits (see Table 2).

However, experts believe that the insurance major is different.

“While the scars of past PSU IPOs may also cast doubt on the fate of the LIC IPO, the organization must be considered beyond the fact that it is a public sector entity and in light of its prospects as a business. There is merit in acknowledging that in addition to lackluster PSU IPOs, there have also been stellar PSU listing offerings” , says Rakesh Singh, CEO of Fisdom Stock Broking.

Performance of PSU shares

Others believe that the LIC is different and will not meet the same fate as other central SOEs. “The insurance company runs a big business, has a huge market share and a brand to be reckoned with. With the economic growth we are talking about for the next 10 years, rising income levels and increasing insurance business, LIC will continue to outperform other insurance companies. There is huge potential for growth and it will bring more and more money into LIC,” says Deven Choksey, MD, KRChoksey Holdings Private Limited.

Will the LIC always be the last resort?

Since its inception, LIC has played the role of government savior. Whether it’s a stock market crash or the possibility of a bank run, successive governments have used the public sector insurance carrier to get out of trouble.

Apart from spearheading the investment culture, savings mobilization and insurance culture in India, LIC has always been at the forefront of the program’s last resort government economy. The company is the largest investor and holder of government bonds, even larger than the Reserve Bank of India. He rescued 11 public issues from government companies.

Going forward, LIC’s role may not change as the government will continue to be the company’s largest shareholder. He will continue to appoint the main officers of the company. The current sale of the stake is only 5% and the government has promised to own at least 51% of the capital of the largest insurance company in the country. It will still be governed by the Life Insurance Corporation Act and will be subject to the control of the Indian Parliament. Although there would be an added burden of scrutiny of operational and financial performance by the investment community, it is unlikely to prevent the government from imposing its decisions on the company, fearing backlash from minority shareholders.

The risk factor on page 39 of the prospectus confirms this.

“Furthermore, our company may be required to take certain actions in furtherance of the economic or political objectives of the Government of India. There can be no assurance that such actions would necessarily benefit our company. The interests of the promoter as the majority shareholder of our company could conflict with the interests of our other shareholders. We cannot assure you that the Promoter will act to resolve any conflict of interest in favor of our Company or the other Shareholders. To the extent that the interests of the Promoter differ from your interests, you may be disadvantaged by any action the Promoter may seek to pursue,” it states.

Simply put, the company may be required to take action in accordance with government policy and such action may result in a disadvantage to shareholders.