The budget 2020 made the big announcement that the government would sell up to 10% stake in LIC. This has been on the cards for some time now and finally the announcement was made. The divestment target for the year has been enhanced to a fantastic Rs.210,000 crore for the coming fiscal. Nearly 50% or more of this will come from the 10% stake in LIC. LIC is not just any other company but is formidable in many ways. It has an equity investment portfolio of $500 billion and in the last two years it has infused more funds into the Indian markets than all the FPIs put together. Even on conservative terms, LIC could be valued close to $15 billion or Rs.10,50,000 crore. So, even a 10% stake sale would help the insurer realize close to Rrs.105,000 crore making the steep divestment target look quite achievable.
What you need to know about the significance of LIC IPO
- The real shift for LIC will be internal and that will impact the insurance industry as a whole. The IPO would mean changing the way it works. It means a lot in terms of bringing in professionalism, adhering to stringent disclosure standards for business processes and financials that are followed by all insurance companies in India
- LIC has been relying on a feet on street model of millions of agents across the length and breadth of the country but now the focus may have to be on smarter and wider use of technology. This will include the aggressive use of technology and better use of human and financial resources to improve the business ROI.
- There are some structural changes that will have to come about. LIC is a government undertaking set up under a separate statute. It was set up in 1956 under the LIC of India Act. According to senior officials of LIC, some important amendments will have to be made before the IPO. For example, Section 24 will have to be amended to regulate how the funds are managed. Additionally, Section 28 will have to be amended if the payout ratio has to be increased from 5% to 10% in line with industry standards. Lastly, Section 37 provides government guarantee to policies and payments and that may have to become more transparent post listing.
What you need to know about the impact of LIC IPO
- The sale of stake will require parliament approval but the real resistance may come from the agents and employees. It could also lead to a churn in the LIC with many of the senior players looking to switch, unless they are adequately incentivized with stock options or similar such carrots.
- LIC currently sells 3 out of every 4 life insurance policies sold in India. Obviously, every investor will scramble to own a slice of LIC. This could create a negative impact on the stock market demand for private insurers.
- LIC has reported 17.5% growth in the value of new business. Private insurers in India like HDFC Life, SBI Life and ICICI Pru Life are growing faster due to their small size. Post listing, LIC will have to benchmark itself against private insurers for better sustenance of market interest and market valuations.
- Valuation of insurance companies is largely based on the value of the new business they generate or are projected to generate. If LIC gets a market cap of Rs.10,50,000 crore, it will be more valuable than Reliance Industries and will have an impact that is almost like Aramco in Saudi Arabia.
- Private insurers may not gain substantially from the listing as LIC policyholders are extremely loyal and the government guarantee works in favour. On the other hand, customers of LIC can now expect better service standards and efficiency from LIC and that means it could really give the private insures a run for their money.
- LIC has sold close to 29 crore policies since inception but the insurance market remains -awfully under-penetrated. From that standpoint, the LIC IPO could be truly transformational. It could make a big impact on the capital markets in general and on insurance sector valuations and performance in particular.