Lower dilution may dash LIC's marquee index inclusion hopes

Life Insurance Corporation (LIC) is expected to hit the initial public offering (IPO) market at a valuation of Rs 6 trillion. The government — which currently owns 100 per cent equity — is looking to divest between 3.5 per cent and 5 per cent stake in the IPO, depending on investor demand.

The lowered valuation and tiny free float shall create a roadblock for the insurance giant’s inclusion in global indices, such as those belonging to MSCI and FTSE, as well as the domestic benchmarks — the Nifty50 and the Sensex.

With a market cap of Rs 6 trillion, LIC will be the country’s fifth most-valued firm, behind Infosys and ahead of ICICI Bank. But its free-float market cap is expected to be between Rs 21,000 crore and Rs 30,000 crore. The free float shall be even lower if one excludes the shares allotted to anchor investors, which have to undergo a lock-in period. As a result, LIC’s free-float market cap will be lower than the smallest Sensex component, Dr. Reddy's Laboratories, and the smallest Nifty 50 component, Hero MotoCorp.

For a quick entry into the Sensex, a company needs to rank among the top 10 in terms of free-float market cap. Free-float market cap -- which is used for index computations -- are those equity shares that are available for trading freely. Shares held by promoters and those under lock-in are not part of free-float m-cap.

“The free-float market cap would be the key dampener for an early inclusion in the MSCI Standard index,” said Abhilash Pagaria of Edelweiss Alternative & Quantitative Research. “As per our understanding of methodology, assuming 5 per cent dilution of the government stake, at least Rs 10.7 trillion market cap as of the close of its first or second trading day, will pave the way for its early inclusion.”

In February, when LIC filed its draft red herring prospectus with market regulator Securities and Exchange Board of India (Sebi), the government was targeting a valuation of Rs 12 trillion. At that valuation, 5 per cent dilution in the IPO would have fetched the government Rs 60,000 crore.

Analysts had projected LIC to make it to the global benchmarks such as those part of the MSCI and FTSE universe, as early as September 2022.

According to experts, they need to see actual dilution in the IPO and the path for further dilution to predict LIC’s entry into global, as well as local indices. Its post-listing performance shall also have a huge bearing on its index inclusion prospects. Other factors, such as inclusion in the futures and options (F&O) segment, too, are key when it comes to inclusion in the Nifty50 index.

LIC is seeking special dispensation from Sebi to dilute less in the IPO. Under the current norms, any company with a market cap of up to Rs 1 trillion has to compulsorily dilute 10 per cent, or Rs 10,000 crore in the IPO. For every incremental market cap above Rs 1 trillion, the dilution is 5 per cent. 

According to this formula, at a Rs 6 trillion valuation, the Centre would have had to dilute Rs 35,000 crore, which is 5.83 per cent stake. Also, large companies are given up to five years to increase the public float to at least 25 per cent.