LIC IPO: A Desperate Rush To List
The Life Insurance Corporation of India’s initial public offer has been touted to be the biggest issue in India’s capital market history. After missing the FY22 deadline and divestment target, the much-awaited IPO is widely expected to hit the market in the first week of May, but at a significantly lower valuation.
After missing several deadlines for filing the draft red herring prospectus, the issue was fast-tracked by the market regulator for a launch in March, only for the Russia-Ukraine war to induce global market volatility. Since then, the investment climate has been unfavourable with the U.S. Federal Reserve turning hawkish, foreign investors continuing to withdraw money from the Indian market, and the resurgence of Covid in China. At home, the RBI has turned hawkish as well, IPO financing to high net-worth individuals is turning out to be expensive and the new RBI regulation on IPO financing has tightened the overall environment for HNIs. On the retail front, money that had moved out from mutual funds and gone into IPOs has reversed its trend.
None of these factors are in the control of the government, which is trying to push the IPO through in a market that is not conducive to getting the best value for the country’s largest insurer.
Analysts had initially estimated the valuation of the issue around 2.5-3 times the embedded value. Due to the external and domestic environment, this is now being estimated around 1.1 times the embedded value. That would imply a revision of the expected overall valuation from Rs 15 lakh crore to around Rs 6 lakh crore. To be clear, some Chinese insurance companies trade at 0.7-0.8 times embedded value and they are among the top five insurers in the world. Meanwhile, Indian private insurers are valued at a significant premium despite their stock prices correcting by 15-20% since the beginning of the year.
A large IPO like LIC requires tailwinds to go through smoothly. This comes in the form of market momentum which is hardly visible in the current situation. In fact, there are multiple headwinds simultaneously in play currently. There is no denying that this is a difficult choice for the government, but any decision to go ahead with the IPO must be weighed in the context of whether the government gets the right value for LIC before the May 12 ‘deadline’.
The May 12 ’Deadline’
Since LIC will attract investors from multiple jurisdictions including the United States, it must follow the regulatory requirement of ensuring its last filed audited numbers are not older than 135 days.
LIC last filed audited financials for the six months ended September 2021. It will file updated audited numbers for the December quarter at the time of the red herring prospectus thus meeting the 135-days criteria if the issue is launched before May 12. But why the fuss over this date?
The argument made is that if the IPO fails to meet the May 12 deadline, LIC will have to provide audited financials for the fourth quarter including the updated embedded value. Consider this—even if the IPO were to happen before May 12, LIC will still be required to present the audited full year FY22 numbers within 60 days of the close of the financial year. It will need to follow all SEBI and IRDAI regulations on financial disclosures.
Audited financials for the year will always provide a better picture, but it is being argued that waiting for the full-year earnings could push the IPO timeline to September as it would require a fresh round of marketing and roadshows and updates to the DRHP. In addition, some quarters contend that the global investment climate could worsen further because of uncertainty over the outcome of the Russia-Ukraine war and Covid-led lockdowns.
The Float Issue
SEBI had relaxed its norms on minimum public float required for companies having a post-issue market capitalisation of more than Rs 1 lakh crore. The IPO size for these companies is pegged at Rs 10,000 crore plus 5% of the incremental market cap above Rs 1 lakh crore.
In LIC’s case, assuming the valuation is pegged at 1.1x the embedded value, the minimum float required as per regulations would be Rs 32,000 crore. An unnamed official has been quoted saying the LIC board approved a float of at least 3.5%. To be clear, the actual float or pricing will be revealed when the RHP is filed.
LIC will be required to reach public shareholding of at least 10% within two years and 25% in five years, according to the SEBI’s February 2021 rules for large IPOs. Of course, all these requirements can change if the government can convince the regulator that they need to be, in LIC’s case.
As the final decision gets taken in the coming week, several factors are outside the control of the government or LIC’s merchant bankers. Should they go ahead with the issue in these conditions or wait? The LIC IPO should not be a ‘tick-the-box’ exercise for the government. This needs to be a showcase issue of the leading Indian insurer valued at par with its peers. A rush to list LIC at what appear to be depressed valuations does not achieve that goal.
Sajeet Manghat is Executive Editor at BloombergQuint.