The mother of all IPOs is here. The Life Insurance Corporation of India has filed a draft red herring prospectus or DRHP with the Securities and Exchange Board of India or Sebi, the markets regulator. The DRHP is about the government’s plan to sell 31.6 million shares of LIC. It owns 100% of the largest insurance company in India and the fifth-biggest globally. The government is looking to offload these shares to institutional and retail investors in India and abroad to get Rs 60,000 crore.
An initial public offering is a proud moment for any company. It gets the capital needed, and the company’s equity shares are available for trading for the public. The purpose of the IPO is an offer to sell 5% of the shares by the government. No money would go to the LIC of India. That happens when the company does not need any money to fund growth. That makes LIC of India’s IPO an extraordinary situation.
There is a lot of literature already in the media about the IPO. When such a giant company lists, it will shake things up.
Benchmark indices
When a company with a potential market cap of Rs140 lakh crore or USD 200 billion lists, benchmark indices cannot ignore the presence of such a large company. It would account for 4% of the market cap on stock exchanges and become the third-largest company by market value after Reliance Industries and TCS. It would become a part of the 30-share S&P BSE Sensex and NSE Nifty sooner than later. By virtue of being an index investor, you will indirectly own shares of LIC. To accommodate the LIC share, these indices would have to push out a bank or a non-banking financial services stock. That could mean shares of that stock would tumble. Financial services is already a dominant sector in these two indices. With LIC’s listing, the index management team would have to do a tight rope walk to represent the underlying stock market activity.
Mutual fund portfolios
Mutual fund portfolios that look to outperform benchmark indices may also make changes to them as a result. A smart fund manager includes stocks other than the index to ensure an outperformance. You may see a churn by institutional investors. They may cut exposure to existing companies like HDFC Life, SBI Life and ICICI Pru Life to accommodate LIC. There is already an impact as the share prices of these companies have shed value since the announcement.
Stock market
Policyholders of the LIC of India will get a discount in the IPO. There are some 27 crore holders of life insurance policies from the LIC of India. However, there could be many individuals with multiple policies. Even if that is the case, the IPO is likely to boost participation in the stock market. According to the government data, there are only 7.3 crores, Demat account holders as of October 2021-22. If the IPO encourages LIC policyholders to subscribe to the offer, that could further expand the number of investor accounts.
What it means to you
A life insurance policy is the first thing you buy at an early stage of your working life. The presence of a LIC agent within the family cannot be missed. There is always a friend or a relative who would make you take up an insurance policy or a unit-linked insurance plan. With the IPO of the biggest insurance company in India, you get access to a company that dominates the sector. It is also the biggest fund manager in India. LIC manages assets worth `39.5 lakh crore.
That is bigger than the businesses that call themselves asset managers like mutual funds. It is quite dramatic in that sense. The biggest differentiator to consider when investing in LIC is a statement in the DRHP. India’s insurance regulator, Insurance Regulatory and Development Authority, says that LIC is a domestic ‘systemically’ important insurer based on size, market importance, and global interconnectedness. The meaning of that is the government of India will not let LIC fail.
(The author is editor-in-chief at www.moneyminute.in)