The Securities and Exchange Board of India (SEBI) has given the go-ahead for a proposal to relax minimum offer norms for IPOs, clearing the path for LIC’s mega IPO.
Companies planning an Initial Public Offer (IPO) need to adhere to some minimum offer norms, according to (SEBI).
As per rules currently in practice, any company that wishes to announce an IPO offer with a post-issue capital of at least Rs 4,000 crore or over would need to offer a minimum of 10 per cent of the post-issue market capital to the public. Also, companies would have to hit a minimum public shareholding target of 25 per cent in three years of being listed.
The latest SEBI approval seeks to relax these norms. This helps big companies like LIC to divest only 5 per cent in the IPO rather than the earlier 10 per cent. Also, LIC will now get five years, instead of the earlier three to ensure that the public shareholding target touches 25 per cent.
Thanks to this move, more large companies will be encouraged to opt for IPO listings and boost capital markets on the lines of LIC. For an issuer who has a post-issue market cap of beyond Rs 1 trillion, the minimum public offer will be reduced to Rs 10,000 crore plus a 5 per cent of the incremental amount crossing Rs 1 trillion. The issuers will also be needed to achieve 10 per cent minimum public shareholding in two years and 25 per cent in five years, according to a SEBI news release.
SEBI analysis of past issuances
According to a SEBI report issued in November 2020 for public comments, analysis on public issuances from 2010 showed that the average issue size of IPO/Offer For Sale (OFS) had increased in the past one decade but the number of issuers had declined. For the period between April 2014 and Oct 2020, SEBI said in the paper that nearly 24 per cent of issuers with a post-issue market cap of over Rs 4,000 crores had “just met” the minimum offer to public rule. In the case of very large issuers with a post-issue market cap of Rs 1 lakh crore or above, the SEBI paper noted they may see difficulty in complying with minimum public shareholding norms of 25 per cent within three years of listing. This made it imperative for the Board to review the norms and give the go-ahead for relaxation.
LIC IPO-related announcements
The go-ahead for relaxation of minimum norms for IPOs follows the Finance Minister’s Budget announcement where it was said that the LIC IPO would be launched in the next financial year, ie, after April 1, 2021. The IPO is expected to hit the markets in the third or fourth quarter. Once listed, the insurer will see a valuation estimate of nearly Rs 10-12 lakh crore, according to reports.
The size of a company like LIC would have been extremely difficult for markets to absorb, and the amendment smoothens this bottleneck for the company.
The Finance Minister had also announced in the Budget that the proposal to bring LIC under the Companies Act would help the insurer avoid any regulatory roadblocks when it launches its IPO. Even though the proposal to sell the government holdings in LIC through an IPO was announced in last year’s Budget, the IPO will see completion this year.
Also, it has recently been announced that 10 per cent of LIC IPO issue size will be reserved for policyholders.
Government’s divestment plans
The latest move by SEBI will boost the government’s divestment plans that have a target of Rs 1.75 lakh crore from sale of its stakes in two PSU banks, an insurance firm and other PSUs. In the fiscal year ending March 31, 2021, the Finance Minister had set a divestment target of Rs 2.1 lakh crore. According to some news reports, the government had raised nearly Rs 18,000 crore through its sale of minority stakes in some Central Public Sector Enterprises and some buyback of shares. Its divestment gains have been in the range of Rs 35,000 crore towards the end of January 2021. The government targets have been deeply impacted by the Covid-19 pandemic.
The LIC IPO, once executed, can ensure that there is greater transparency and accountability in its functioning, said Fitch Ratings, when the government announced the LIC IPO in 2020. Also, it added that the government’s intent to complete execution in the coming fiscal will mean there’s a ripple effect on the insurance industry in India. The insurance sector is likely to benefit from attracting more overseas capital inflow.
The new SEBI norms will come as a much-needed push for the mega LIC IPO to see execution in the latter part of the coming fiscal year. The IPO is expected to bring more investor interest into the markets and deepen the equity market scene.