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After much uncertainty, the Life Insurance Corporation of India (LIC) has filed its Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI). The initial public offering is for 31.6 crore shares or 5 per cent of the government’s stake. As per the DRHP, LIC’s embedded value — a measure of the consolidated shareholders value in an insurance company— has been estimated at Rs 5.39 lakh crore. While the offer price is yet to be disclosed, insurance companies typically tend to trade at a multiple of their embedded value. Thus the IPO will likely dwarf the recent Paytm offering, which had shattered the record for the largest offering. A successful fructification of the IPO by March would help the government achieve its scaled down disinvestment target of Rs 78,000 crore of which it has only been able to garner Rs 12,030 crore so far.
The size of the insurance behemoth is truly staggering. As of March 31, 2021, LIC had a 66.2 per cent market share in new business premiums, a 74.6 per cent share in individual policies issued, and a 81.1 per cent share of number of group policies issued for 2020-21. Though, increasingly LIC has been ceding space to private players — between 2015-16 and 2020-21, private sector life insurance players saw their premiums grow at 18 per cent, while LIC’s premium grew at 9 per cent — India is still an under-penetrated market. The country’s insurance density is much lower than that of other developing countries which indicates scope for growth.
The IPO comes at a time of tightening global financial conditions. Foreign investors have already pulled out billions this year. And though it is bound to generate interest, there are concerns about the capacity of the market to absorb such a large offering. Further, considering that in the past, LIC has often been used by the government to serve its own ends — for instance, it helped bail out the troubled IDBI bank — there are legitimate concerns that its investment decisions may continue to be guided by other motives. As the DRHP notes: The “corporation may be required to take certain actions in furtherance of the GoI’s economic or policy objectives. There can be no assurance that such actions would necessarily be beneficial to our Corporation.” While a listing on the exchanges will open LIC’s governance structures and investment decisions to public scrutiny, continued government interference in its decision making will affect the corporation’s prospects. The steep discounts that public sector companies trade at when compared to their private sector counterparts is a reflection of this pattern. Considering that LIC is a custodian of the policy holder’s money, the government must resist the temptation of using its coffers for its own purpose.
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