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% government stake. According to the DRHP, the intrinsic value of LIC – a measure of consolidated shareholder value of an insurance company – has been estimated at Rs 5.39 lakh crore. Although the offer price has not yet been disclosed, insurance companies generally tend to trade at a multiple of their intrinsic value. Thus, the IPO will likely eclipse the recent Paytm offering, which broke the record for the largest offering. A successful fruition of the IPO by March would help the government achieve its reduced divestment target of Rs 78,000 crore from which it has only been able to raise Rs 12,030 crore so far.
The size of the insurance giant is truly staggering. As of March 31, 2021, LIC held a 66.2% market share in new business premiums, a 74.6% share in individual policies issued and an 81.1% share in the number of group policies issued. for 2020-2021. Although increasingly LIC is giving way to private players – between 2015-16 and 2020-21, private sector life insurance players saw their premiums increase by 18%, while the premium of LIC increased by 9% – India is still under-penetrated market. The country’s insurance density is far below that of other developing countries, indicating room for growth.
The IPO comes at a time when global financial conditions are tightening. Foreign investors have already withdrawn billions this year. And while it is sure to generate interest, concerns remain about the market’s ability to absorb such a large supply. Furthermore, given that in the past LIC has often been used by the government to further its own ends – for example, it helped bail out the ailing IDBI bank – there are legitimate concerns that its investment decisions could continue to be guided by other motives. . As DRHP points out: “The 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. While a public listing will open LIC’s governance structures and investment decisions to public scrutiny, continued government interference in its decision-making will affect the company’s outlook. The deep discounts at which public sector companies are trading relative to their private sector counterparts reflect this trend. Considering that LIC is a depository of policyholders’ money, the government must resist the temptation to use its coffers for its own purposes.
This editorial first appeared in the print edition of February 15, 2022 under the title “Insuring India”.