LIC IPO that was touted as the Aramco moment of the Indian stock market seems to be turning into an Armageddon moment for IPOs of government companies. It seems that in its rush to divest LIC, the government overestimated either the depth of the Indian equities market, or overvalued the company itself. The fate of LIC IPO may have jeopardised the motivation of many newbie retail investors and is likely to challenge public's trust in future government-backed IPOs.
Even the anchor investors of LIC IPO, who were given special treatment by change of rules, have not been spared from heavy losses that LIC listing brought forth. The anchor investors were allotted 5,92,96,853 (approx. 5.93 crore) shares at a price of ₹949 per share, in the IPO. These shares were locked in for a period of 30 days (an exception provided exclusively to this IPO against the standard 90 days lock-in), after which 100% of the allotted shares could be sold off by the anchor investors. The lock-in period ended on Monday, June 13 and the LIC stock's closing price on Friday, June 10 was ₹709.7, indicating wealth erosion of 25.2% for the anchor investors. The share's closing price slid to ₹668.25 on June 13. So the IPO subscribers of LIC, who are holding on to those shares, have ended up facing a loss of about 29.6% per share within less than a month from the listing date. The 5.8% fall in LIC share price within one day also implies that anchor investors sold heavily on the very day their lock-in period ended, thus displaying their eagerness to cut their losses at the earliest.
LIC IPO which offloaded only 3.5% of equity sailed through a sea of exemptions and navigated the storm of bogus subscription applications (read story).
The kind of reaction it received from the market raises multiple questions. If the authorities' judgment (including investment bankers for the IPO, DIPM officials, other government officials involved in IPO and LIC management) about the company's valuation was really so much off the mark, their wisdom and prudence is questionable. If the high valuation was knowingly made to merely achieve divestment goals without caring about future losses to the public, the empathy and responsibility towards the general public is questionable.
People's Insurer Failed To Protect People's Stock Market Investments
How prudent was it to launch the IPO of LIC when both indigenous and global scenario was already gloomy? India itself was struggling with historically high inflation, RBI was expected to increase interest rates, Foreign institutional investors were fleeing Indian equities market, and commodity prices were soaring due to the Russia-Ukraine war at the time of public listing of LIC. The situation remains the same even now, except that RBI adopted hawkish stance and increased repo rates just after LIC management ended the IPO's roadshows. It would be foolish to assume that the bureaucratic machinery that brought forth LIC IPO was not aware of such macro-economic scenario or its potential ramifications on the Indian equity market. Yet, lakhs of retail investors were lured into putting their hard-earned money into the IPO.
It was subscribed by 52,87,529 (approx. 53 Lakh) applicants belonging to retail or HNI category. A total of 19,44,545 (about 19.5 lakh) of retail investors subscribing to the LIC IPO were its policyholders. Every such investor currently holding on to LIC shares is making a loss of ₹280.75 per share as on June 13, 2022. This loss is likely to increase as more of anchor investor shares flood the market.
One can only imagine the state of LIC stock price when the company would need to divest a total of 10% of its equity to the public in another two years, and 15% more within the next three years.
What went wrong with LIC stock price?
LIC draft red herring prospectus filed in mid-February 2022 proposed offering 5% equity to the market at that time. The rules were changed later that allowed LIC to offer only 3.5% of equity as IPO, for which the price discovery happened at ₹949. The company floated 22.13 crore shares, out of which 35% were reserved for retail investors, as per regulations. 10% of IPO shares were also reserved for LIC Policyholders, although it is not clear whether this 10% was in addition to 35% retail quota.
The valuation of LIC at the time of IPO was slightly more than ₹6 lakh crore, while the market capitalisation of all stocks available at Bombay Stock Exchange at that time was slightly above ₹243 lakh crore. This implies that LIC's market cap, singularly, was pegged to be equal to about 2.5% of BSE listed universe. For an IPO to succeed, either the valuation of the company should be pegged as per market's expectations or the market's capacity should be deep enough to honour the valuation. The falling prices of LIC stocks indicate that either the company's valuation or the market's capacity to absorb the flood of LIC equities is off the mark. The current numbers, however, indicate that LIC's stock price may not be due to market conditions but may be inherent to the stock itself.
In the last 30 days, the BSE Sensex moved up from 52,794 to 52,846. Also, the BFSI stocks, especially the established players of the insurance segment have seen a commendable upswing. In the last 30 days, HDFC stocks rose from 550 to 583, ICICI Prudential rose from 489 to 542, and SBI Life registered growth from 1,045 to 1,133. LIC is a gigantic entity as compared to any of the aforementioned players, and yet its shares have performed abysmally in comparison. Could it be possible that in their zeal to fulfil their divestment targets, LIC was over-valued?