LIC IPO Listing: What Are The Pros and Cons of Investing?

[00:00:00] The wait is over. India's biggest initial public offering or IPO of Life Insurance Corporation of India kicked off a subscription for retail institutional investors today, that is on 4th May. Since it's completely an offer for sale, all the proceedings will directly

[00:00:27] go to the government which is expecting to raise Rs 21,000 crores by selling a 3.5% take of LIC in a bid to replenish the public coffers that have been drained out by the pandemic.

[00:00:38] But moving on to the pricing details, the price span for this IPO has been set at Rs 902-949 per share for the sale of 22.13 crores equity shares. There's also a discount offer of Rs 60 per share for its policy holders and Rs 45 apiece for retail investors and LIC

[00:00:57] employees. The LIC IPO will close on 9th May and the company will be listed on the stock exchange on 17th May. And the first two hours of the first day of bidding itself

[00:01:08] saw a pretty decent response with a subscription of around 28% by 12 noon and by the time of the recording of this podcast at around 5pm it was at 58%. Expectedly in the months leading up to this massive IPO listing, there's been a lot of buzz around this partly because

[00:01:25] LIC which is a state-run insurance company has been a household name in the country for several decades given that it's the biggest and oldest insurance company in India. But after some newly listed stocks of companies like Zomato, Nikea and Paytm hit record lows

[00:01:41] after many weeks of record highs. There's also been a big question among policy holders and investors and the question is to invest or not to invest? While that's a tricky question to answer, what are the pros and cons of investing? We'll take that question to our

[00:01:56] guest today in the podcast Mr. Prasenjit Dutta who's the former editor of Business World and Business Today. We'll also hear from senior journalist Madhava Narayanan on his take on why the government is going ahead with this IPO listing under such volatile market conditions.

[00:02:14] You're tuned in to the big story, the podcast where we dissect the headline making news for you and I'm your host, Shorbree. Before we get to the big question, let's look at all the important details that you need to know around this IPO

[00:02:30] listing first. As I said, LIC has been a household name in middle-class families ever since it was created in 1956. In fact, the BMR enjoyed a total monopoly for more than four decades till the late 90s until the sector was open to the private players and although its

[00:02:46] market share has shrunk to 64.1% in 2020, it's still the country's largest life insurer holding two-thirds of the insurance market share. In fact, according to reports, it approximately has 30 crore policy holders and 13 lakh agents accounting for 55% of the total agent network

[00:03:04] and that's part of the reason that this IPO listing looks appealing. Now, initially the center was expecting to generate Rs 63,000 crores by selling a 5% stake in the life insurance firm to meet the curtailed disinvestment target of Rs 78,000 crores in the current

[00:03:21] but then it cut down the size of the IPO to 3.5% to raise around Rs 21,000 crores in view of the volatile market conditions. In fact, when the Russia-Ukraine conflict blew up into a full fledged war, there were also some indications around March that the IPO listing might get

[00:03:37] deferred to a more opportune moment which might ensure garnering the maximum value of the LIC holdings and senior journalist Madhavan Narayanan also points out that the market is in an uncertain mood globally which has made this more of a buyer's market than a seller's market.

[00:04:16] The market is in a bit of an uncertain mood if you look at inflation today. Australia's inflation has risen to 20 years. India's inflation has also been in double digits. It's already retail prices have increased by 7% whereas the RBI has banned it at 6%.

[00:04:59] Overall, the Ukraine war is also happening. Therefore, there is a tussle over everything from ruble payment to speculation on nuclear war and all that. So, it's a market in a bad

[00:05:12] mood both in terms of amount of money you can play with because a lot of market players are essentially a play with borrowed money. So, that also sets the mood for acquisitions and

[00:05:29] this thing. So what happens is typically this becomes more of a buyer's market than a seller's market. Yet despite the reduced valuations, the IPO remains India's largest ever surpassing the PTIM IPO listing from 2021 which had raked in Rs 18,300 crores. But as we talk about the moody

[00:05:51] market one also wonders why have this IPO listing under such volatile market conditions in the first place? Why not just wait it out? Is it a desperate move? In response to these questions this is what LIC chairperson Mr. Emal Kumar told Bloomberg-Quint in an interview.

[00:06:08] I would call it desperation. In fact, it is a sign of strength. I would say that even in this condition where most IPOs are put on the back burner we are going ahead with it and that strength

[00:06:19] comes from the fact that we know the market. We've been investment managers for decades now, we know how things pan out and we believe we have the confidence that this can happen. Mr. Narayanan also adds to it he believes that despite the unfavorable market conditions

[00:06:33] and the reduced valuation it makes sense for the government to have the LIC IPO for three reasons. One, the government will get some money anyway. Two, it can also show that they're going ahead with the reform process and privatization. And three, if it's a buyer's market the government

[00:06:49] could use the money for the extra expenditure that they might need to control the fiscal deficit. You will not be in a mode to pay more as a buyer. So the government tends to,

[00:07:02] the government is keen to get this process going. It gets money and also it wants to show that it's going on with the reform process. Therefore, the only way out is I shall hold

[00:07:14] things all together or drop the price in a way that it doesn't look like a failure when it actually happens. You look at what happened to Paytm, right? Drop the price that people are

[00:07:24] likely to buy more and the person who wanted to was planning to invest in 100 shares will probably buy 120. But and the person who may was not planning to buy at all may consider buying because the valuation is right, you know, more attractive. So for the government,

[00:07:43] the Ukraine war was a big setback because it was planning to have their LIC IPO sometime in March or so of every so it could be taken to account in the old financial year. Now,

[00:07:53] if you look at the current year, the new financial year has come out with new problems because the market rate interest rates have gone up, which basically means what's called bond yields is basically inching out, which basically means the government also cannot borrow easily.

[00:08:09] Because if it borrowed, it has to pay a slightly a notch half a percent point more perhaps. If that happens, you know, that you can check with some of the stories on bonds, you will probably because I follow everything. But, you know, I don't look at

[00:08:23] my new details except where I'm writing about it because there's only so much you can carry in your head. But market borrowings are if interest rate goes up as it is the government's cost of money

[00:08:34] goes up, you know, that's also an expenditure, right? So it makes sense for the government to have the IPO so that a you will get some money anyway. B you can show that you are going ahead with the reform process and privatization. And see, you cannot, you're

[00:08:51] in a buyer's market. Therefore, you could do with the money for the extra expenditure you might need to control the fiscal deficit. Now, in the 3.5 percent stake that is being offered, 10 percent of the shares are reserved for LIC policy holders, 0.7 percent for LIC employees

[00:09:14] while 31.25 percent is reserved for household investors. And at the time of the recording of this podcast, according to money control, the LIC policy holders had led the initial bout of buying in an insurance IPO having subscribed 1.8 times the portion that was reserved for them. The

[00:09:30] employee reserved portion had been subscribed 100 percent while retail investors portion had been subscribed at 55 percent. But now coming to the main question to invest or to not invest. Well, there's no simple answer for that. Rather, what one can look at are the pros and cons of

[00:09:46] investing. The former editor of Business World and Business Today, Prasenjit Dutta, breaks down the pros for us first. The pros are very simple. It is still, it is not only the holders but it is still by far the biggest life insurance company in the

[00:10:01] country by a large margin. No private sector company even despite their growth come anywhere in terms of the corporate managers, the number of people that ensures it is huge. Plus it makes a

[00:10:15] lot of money. If you just look at its profits, it is massive. Those are the pros. And finally, pricing seems fairly attractive given that it has been reduced quite sharply from what was originally thought would be the price band in which it would

[00:10:35] So those are the pros. But coming to the cons, Mr Dutta points out that at the end of the day, the government is the overwhelming own of the company and it's not a commercial owner. The government could have more social goals, he says, which means

[00:10:48] that it's not going to be an out and out profit making entity. Listen in. Now look at the cons. Yeah, the cons are very simple that at the end of it what is the amount which is being sold to the public and to investors that is 3.5% right?

[00:11:06] Yeah, now the government is the overwhelming owner of the insurance. And remember that the government is not a commercial owner. It is not as if the government only looks at that shareholder wealth. The government has many other purposes. It could be something like

[00:11:32] how to do a deeper penetration of insurance in the country. So there could be a lot of social goals of the government. So in that sense, it is not an out and out profit making entity.

[00:11:53] And that is the con. You will be one of the people who holds 3.5% of the total amount as an investor. It doesn't give you any say in saying that this should be done like this or it should become

[00:12:11] more efficient or anything. So you're essentially hoping that the government will look kindly and look at shareholder maximization which may or may not be the case. Yeah, and that is why it is hard to look at it from that angle that whether it will be a good buy.

[00:12:32] The second problem is that if you look at the government entity since liberalization by and large most of them have not been able to hold on to their market share or profit budget in any sector. Once private players come in, they start nibbling initially

[00:12:50] their correspond but later on they start becoming the big daddy than over a period of time these languages. Now I am saying that LIC is a long way away from that situation but we already see

[00:13:04] that every year private sector companies are eating into its market share. And this is where we'll end the podcast today but do tune in tomorrow for a new episode of The Big Story. If you like listening to this episode please subscribe to the Big Story playlist for

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