The Department of Financial Services will soon write to the legislative and disinvestment departments to initiate the process for the proposed initial public offering of the country’s biggest life insurer, a finance ministry official has said.
The Department of Financial Services will seek the opinion of the two departments on the legislative changes needed for the proposed IPO of state-run Life Insurance Corp of India to take place, Cogencis reported, citing the official.
The government will have to amend parts of the LIC Act, relating to the sovereign guarantee, use of surplus, and bifurcation of insurers’ funds, LIC chairman M R Kumar had said previously.
Earlier this month, Finance Secretary Rajiv Kumar had said that the IPO is likely to take place in the second half of the next financial year, which ends on 31 March 2021. This would mean some time between 1 September 2020 and 31 March 2021.
However, Macquarie Capital Securities has said that the chances of the IPO being launched in FY2021 is very low, given a slew of challenges, including valuations and legal issues.
“Even the IPO of SBI Life, which is a far simpler organisation, took 9-12 months to prepare the embedded value (EV)/valuation report and get approvals, etc. Therefore, we believe the chances of an IPO in FY21 are very low,” Macquarie analysts noted.
They point out that apart from legal challenges of amending the LIC Act and converting LIC to a company under the Companies Act, the biggest problem is that in the case of LIC, the entire surplus is in the form of 95:5 — 95% for policyholders and 5% for shareholders.
“So even if there is a surplus from non-par (non-participating) or unit linked insurance products or the protection book, everything is transferred to one common book and shared 95:5,” they said.
“This is unlike in the private sector where only par policies have a 90:10 ratio and the rest is attributable to shareholders. So, if the government wants to list LIC, then they have to create three separate categories/funds— the traditional par book, non-par book and shareholders’ funds,” they added.
To extract value, LIC will need to divide the surplus in such a way that the benefits illustrated to the par policyholders are maintained and the rest of the surplus is transferred to the shareholders’ account after assuring that in the non-par book there are enough assets to take care of liabilities, the analysts say.
The valuation and capitalisation related challenges are not simple either.
Theoretically, the EV could only be the present value of 5% of the surplus attributable to the shareholders, and that number is very low at INR200bn ($2.8bn) to INR250bn, they say. “Now this doesn’t include the MTM (marked to market) on the massive real-estate properties that LIC owns and huge unrealised gains on the government securities and equity book, which is an element of uncertainty,” they added.
The LIC public offer, set to be the largest IPO in the country ever, was proposed in the Budget for 2020-21 on 1 February. LIC’s flotation is to be a key part of the government’s target to raise INR2.1tn from the divestment of public assets and equity holdings in various public sector enterprises.