LIC IPO: Search for anchor investors begins, govt may seek higher valuation

Govt asks I-bankers to approach big investors

Merchant bankers appointed by the Union government have been asked to draw up a list of large investors that may act as anchor investors in the initial public offering (IPO) of Life Insurance Corporation of India (LIC), according to officials privy to the matter. The IPO, touted to be India’s largest, may need heavy lifting from anchor investors as the government is likely to seek a higher valuation for the insurer.

With LIC all set to file its draft red herring prospectus (DRHP), government-appointed merchant bankers have been asked to approach large investors. In some cases, engagement with such investors has already started as the IPO process is targeted to be completed by the end of this financial year, said an official.

Goldman Sachs (India) Securities, Citigroup Global Markets India, Nomura Financial Advisory and Securities India, SBI Capital Market, JM Financial, Axis Capital, BofA Securities, JP Morgan India, ICICI Securities, and Kotak Mahindra Capital are the merchant bankers assisting the government in LIC’s initial offering.

Since the IPO would be India’s biggest, it would require support from anchor investors, even as the government expects huge participation by retail investors, including LIC’s policyholders, said another official.

“The issue of LIC’s size would require huge lifting by anchor investors but investors are keen to invest in the insurer as it’s a market leader,” the official said. “LIC has been the last resort to supply liquidity for any government equity sale but this time, it will itself require immense support from both domestic and foreign institutional investors.”  

The embedded value of LIC has been pegged at Rs 4-5 trillion by the government-appointed actuary, and the Centre is reportedly expecting the insurer’s market valuation to be Rs 15 trillion. Even as the market value of LIC is expected to be finalised after deliberations with merchant bankers, a 5 per cent or a 10 per cent stake sale at government-expected valuation would fetch Rs 75,000 crore and Rs 1.5 trillion, respectively. The embedded valuation work is being done by LIC and its valuation advisor Ernst & Young, the finance ministry said on Sunday.

The insurance giant is set to file the DRHP later this month as the Centre looks to launch the insurer’s IPO in March.

“Large investors have not reviewed operations of LIC and its outlook over the years, and they need additional comfort that the price at which the company is valued is viable,” said Sandeep Shah, managing partner at N A Shah Associates.

Amid the third Covid-19 wave, the government is reaching out to marquee international investors to provide comfort on IPO issue price and the insurer’s outlook to ensure the offering is not impacted, Shah said.

Earlier this month, Union Finance Minister Nirmala Sitharaman reviewed the progress in the IPO process against the backdrop of the ongoing third Covid-19 wave. Even though the latest wave of the pandemic may lead to disruptions, the government is hopeful of the insurer’s public listing in March. The proceeds from the IPO shall help the government meet a chunk of its Rs 1.75 trillion divestment target for the ongoing fiscal year.

LIC has also finalised a gradual increase of the insurer’s distributable surplus to shareholders, a key requirement for the IPO of the insurer. From next year, LIC would distribute 7.5 per cent of its surplus to shareholders, from 5 per cent at present, for two years, and then gradually increase it to the industry norm of 10 per cent. The share of policyholders in the insurer’s surplus would be lowered to 92.5 per cent, from 95 per cent at present, for two years and then would be brought down to the industry norm of 90 per cent.