Excited about LIC IPO? Consider these risks before planning to invest


According to the DRHP (Draft Red Herring Prospectus), the public issue is completely an offer for sale where the government will sell 5% stake or 31.6 crore shares in the insurance behemoth. No fresh stock will be issued for the IPO. The Government holds 100% stake or over 632.49 crore shares in LIC. The face value of shares is 10 apiece.

The government, however, did not disclose in the DRHP the market valuation of LIC or the discount which will be given to policyholders or LIC employees in the public offering.

Despite a steady decline in market share, LIC continues to lead the pack with 64% the life insurance market in the country of 1.4 billion people.

According to the draft red herring prospectus, LIC’s embedded value, which is a measures of the consolidated shareholders value in an insurance company, has been pegged at about 5.4 lakh crore as of September 30, 2021, by international actuarial firm Milliman Advisors.

With staff of more than 100,000 people, its vast assets under management of 36.7 trillion ($491 billion) equate to nearly 16% of India’s gross domestic product.

LIC in turn is one of India’s biggest institutional investors, with significant stakes in Indian blue-chip stocks like Reliance, TCS, Infosys and ITC.

According to the draft papers, LIC reported a profit of 1,437 crore for the first half of the financial year 2021-22 as compared with 6.14 crore in the year-ago period. Its new business premium growth rate stood at 554.1% in the same period as against 394.76% during the same period last year.

Investors and analysts are gearing up to the LIC IPO, which may hit the markets in March, and once listed the market cap could be among the top listed companies like Reliance Industries Ltd (RIL) and Tata Consultancy Services (TCS).

However, there are some risks attached to the IPO, which have been mentioned in the DRHP, that investors should consider carefully before planning to invest in the IPO.

– Customer preferences and market trends for life insurance, health insurance and pension products may change, and LIC said it may be unable to respond appropriately or in time to sustain our business or our market share in the markets in which it operates

– Non compliance with Sebi norms

According to the Sebi regulations, any shareholder is barred from holding 10% or more of the shareholding or voting rights in any asset management company. However, LIC owns, directly, 49% of the outstanding shares in LICMF (LIC Mutual Fund Asset Management) Trustee. LIC also owns 49% stake in the IDBI Bank. Efforts were made to explore various possibilities for divesting IDBI Bank’s stake in its mutual fund business, including by way of merger, sale of company or mutual fund asset to another entity, in order to ensure compliance with the SEBI MF Regulations, LIC said.

– Further infusion of funds in IDBI Bank

While LIC believes that IDBI Bank, one of the associates, does not need to raise further capital at the moment, it may be required to infuse additional funds into IDBI Bank in the future. LIC may also be required to ensure that one of the associates cease undertaking housing finance activities in order to comply with regulatory requirement. LIC infused 4,743 crore into IDBI Bank in 2019 using policyholders’ funds.

If IDBI Bank requires additional capital prior to the expiry of the applicable five-year period and it is unable to raise capital, we would be required to infuse additional funds into IDBI Bank, which may have an adverse effect on our financial condition and results of operations, LIC said in its DRHP.

– Influence of government

LIC said the government which owns nearly 100% stake currently in the coroporation and even after the listing about 95% continues to be the promoter and exercise significant influence on the company. The corporation may be required to take certain actions in furtherance of the GoI’s economic or policy objectives. “There can be no assurance that such actions would necessarily be beneficial to our Corporation,” LIC said

“The interests of the Promoter as the controlling Shareholder of our Corporation could be in conflict with the interests of our other Shareholders. We cannot assure you that the Promoter will act to resolve any conflicts of interest in favour of our Corporation or the other Shareholders. To the extent that the interests of the Promoter differ from your interests, you may be disadvantaged by any action that the Promoter may seek to pursue,” it added.

– Segregation of the single consolidated ‘Life Fund’ of our Corporation into two separate funds, viz., a participating policyholders’ fund and a non-participating policyholders’ fund, effective September 30, 2021 may adversely affect the business, financial condition, results of operations and cash flows

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