The Government of India has agreed to launch an IPO of the shares of LIC (Life Insurance Corporation of India). Given the size of the corporation and the fact that it is the largest life insurer in India, the LIC IPO launch is expected to be the most significant IPO launch in recent time. Moving ahead with the plan, the government has sought bids from consulting firms, investment bankers, and financial institutions for assisting them with the proposal.
In this year’s budget session, Finance Minister (FM) Nirmala Sitharaman declared the current government’s intention to sell some of its stake in LIC. The proposal received a lot of lash back from the opponents.
A little about LIC
LIC, the largest life insurer in India, incorporated in 1956. In total business volume, LIC controls 72 percent of the market. During FY 2018-19, the insurer’s total asset volume rose to an all-time high to Rs 31.11 lakh crore, upped by 9.4 percent from the previous year. The market leader also enjoys 66.24 percent market share in total first-year premium collection.
LIC is a state-owned organization since the beginning. So, when the government decided to offload some stakes in LIC, it was met with a lot of speculations.
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Preparing the path of disinvestment in LIC
Undoubtedly, Life Insurance Corporation of India IPO launch is a piece of big news. And since the FM declared it in FY 20-21 budget, there is a lot of speculations going on in the market. Experts are trying to gauge its impact and implications on India’s capital market in the future. The market is on a tizzy to guess the volume of the deal.
Although the government is yet to make the details public, market experts estimated that even if the government liquidate 5 -10 percent of its equity in LIC, it would be the largest ever IPO deal in the Indian market. In seeking bidding from transaction advisors, the government has specified that applicants must have previous experience in managing IPO size of at least Rs 5,000 crore or capital market transactions of Rs 15,000 crore.
What is disinvestment?
While we are at this topic, let us also discuss disinvestment.
In India, disinvestment means selling or liquidation of government shares in an organization or asset to non-government parties. It is not exactly same as privatization, although both terms are often used interchangeably. In disinvestment, the government doesn’t let go of complete control over the organization. It retains more than 50 percent shares which allows it to remain at the helm. The government might initiate a disinvestment effort for the following reasons.
- Reducing the fiscal burden and restoring balance sheet
- Improving public finance
- Encourage private investors
- Raising funds for development projects and promote growth
Disinvestment can be catalytic to the long-term growth of the country. It is also crucial for developing and strengthening the capital market.
Government has set the ball rolling for India’s largest-ever IPO lunch. The Department of Public Asset Management (DIPAM) has asked transaction advisors to submit bidding. At least two pre-IPO transaction advisors will be appointed by the government to assist with the nitty-gritty of the deal. The IPO is estimated to fetch Rs 90,000 crore of Rs 2.10 lakh crore of government’s target to raise through various disinvestment plans in the current financial year.
Investors can benefit from investing in the equities of the insurer, benefiting from underwriting profits as well as profit from the stocks. Besides, it will add transparency to LIC’s operation; as from now on, it’ll have to update exchanges about its financial numbers and other market-related activities.