The timeless idiom, ‘you show me the man and I will show you the rule’, may have been made for the initial public offering (IPO) launch of Life Insurance Corporation (LIC). The quality and the quantity of exemptions that have been made for the LIC IPO launch show the rule of law is applicable only to those who do not make the law.
The exemptions and amendments brought about for the sake of LIC may have serious consequences for the Indian capital market in future because it is setting legal precedence for other entities to appeal for the same treatment in future IPOs.
Exemption 1: Leniency in the statutory requirement of equity dilution
Through its draft red herring prospectus in mid-February, LIC had earlier proposed dilution of 5% of the total equity of the company but ultimately launched its IPO by diluting only 3.5%. Interestingly, there is no provision for diluting less than 5% equity in the Securities Contract Regulation Rules currently. And even the rule of 5% equity dilution was made to accommodate LIC’s IPO.
The government amended Securities Contracts (Regulations) Rules (SCRR), 1957, through a notification on June 19, 2021. The amended rule states "at least such percentage of each class or kind of equity shares or debentures convertible into equity shares issued by the company equivalent to the value of five thousand crore rupees and at least five per cent of each such class or kind of equity shares or debenture convertible into equity shares issued by the company, if the post-issue capital of the company calculated at offer price is above Rs one lakh crore rupees; Provided that the company referred to in this sub-clause (iv) shall increase its public shareholding to at least ten per cent within a period of 2 years and at least twenty-five per cent, within a period of five years, from the date of listing of the securities, in the manner specified by SEBI."
Exemption 2: Allowing a separate class of investors, namely policyholders to subscribe to LIC IPO, which is not allowed as per the ICDR.
LIC has offered up to 10% of the issue size reservation for LIC policyholders. However, as per the current laws, reservation for customers, who are ‘policyholders’ in the case of LIC, is, prima-facie, not permissible. The Issue of Capital and Disclosure regulations (ICDR), clause 31 (1) with the heading ‘Reservation on a Competitive Basis’, states: The issuer may make reservations on a competitive basis out of the issue size excluding promoters' contribution in favour of the following categories of persons:
b) Shareholders (other than promoters and promoter group) of listed subsidiaries or listed promoter companies.
Apart from these two categories of persons, ICDR does not allow reservations for any other class of persons, for any company’s IPO.
Fortune India sent an enquiry to LIC and SEBI in February 2022, asking whether LIC has sought an exemption from the regulator to offer reservations for its policyholders, and on what basis it got the exemption, if at all. Both LIC and SEBI chose not to respond.
Exemption 3: Relaxation of lock-in period for anchor investors.
The ICDR rule, Schedule XIII, Part A, Clause 10 (j) allows an anchor investor to sell only 50% of the shares allotted after 30 days from the date of allotment. According to market sources, LIC anchor investors are allowed to sell 100% of their allotted shares after 30 days from the allotment. It is still not clear under what rules, this exemption has been provided to the insurance behemoth.
Consequences of exemptions made for LIC
From the legal perspective, the LIC IPO is opening up vistas for other companies to take advantage of the regulatory flexibility that was offered to LIC. The Doctrine of Stare Decisis, in legalese, implies that any judicial or quasi-judicial authority will be guided by earlier decisions, or precedence, to decide upon the present matter in consideration. This means that in future if a company seeks exemptions from certain regulations of ICDR, it can appeal on the basis of exemptions granted to LIC.
Thus, when LIC can reserve shares in its IPO for its policyholders, in future, a telco’s IPO may reserve a share quota for its subscribers, or a retail chain may seek to reserve share quota for its channel partners, or a bank may seek the same for its account-holders.
In fact, as per principles of natural justice, every company with listing aspirations should now be able to reserve a quota of IPO for their own class of customers. By the same principles, relaxation of the lock-in period for anchor investors may be sought whenever there is a national or global crisis that affects the market.
Citing the size of the company, its crucial role in nation-building, or the condition of the market, if LIC can launch IPO by diluting only 3.5% of its equity, other behemoths who are operating in crucial sectors like telecom, financial services, agriculture, or health, etc may use the same argument to dilute smaller equity only.
All the exemptions made for LIC mentioned here have not been incorporated into the ICDR rules, so far. Neither SEBI nor LIC has clarified the basis for the grant of exemptions, which are clear deviations from the existing law. As per legal experts, the ambiguity surrounding the special treatment given to LIC will make it easier for others to seek exemptions as there are no rules that define the basis on which exemptions may be granted or denied.
Any legal system that has ambiguous provisions is a fertile ground for exploitation by those who have the resources to bend the laws to their advantage. To make the current ICDR stringent again, the legislature and the regulator must amend the ICDR to explicitly clarify the provisions under which certain leniency may be granted to future IPOs.