LIC IPO size cut by one-third, valuation by half

The latest development in the LIC IPO is the slashing of issue size from 5% to 3.5% of total equity of the company. LIC will open its IPO to the public on May 4 and the process concludes on May 9. Through this IPO, the Government of India, the sole owner of LIC, is now aiming to raise ₹21,000 crore, as opposed to raising between ₹65,000 crore to ₹70,000 crore by diluting 5% equity earlier, indicating more than 50% compromise on valuation as well.

The LIC IPO, which was supposed to be the Aramco moment for Indian capital markets, is losing its fizz with every new development regarding its launch. Now the price band is expected to be in the range of ₹954 to ₹960 per share, almost half of the earlier price band predicted by the market.

Interestingly, currently there is no provision for diluting less than 5% of equity in the Securities Contract Regulation Rules. As per the Rules, the insurance giant would also need to dilute 10% and 25% equity within two and five years of listing, respectively.

The lower valuation of the IPO along with the current despondency of the market, with the exodus of foreign institutional investors (FIIs), indicates the shallowness of the Indian stock market. The developments also suggest that even domestic institutional investors (DIIs) and retail crowd, together, cannot match the deep pockets of FIIs that are indispensable for supporting gigantic IPOs.

Under these circumstances, concerns arise over the prudence and necessity of launching an IPO of a crown jewel like LIC.

Is Indian stock market ready for an IPO like LIC?

The government made multiple changes in Securities Contract Regulation Rules, and 27 amendments in The LIC Act 1956 to make way for the LIC IPO. However, these amendments cannot control the market forces that appear to be ill-equipped to absorb the gargantuan amount of equity-value that LIC will gush into the Indian capital market.

Smaller IPO size along with government willingness to accept lower valuation hint market participants were reluctant to accept huge supply of LIC shares. Like any commodity, equities in the capital market too work on demand-supply principle. If there is a scarcity of shares then the price of the available pool of shares moves up, and reverse happens in case of abundance of shares.

However, despite launching with a smaller percentage of equity dilution, two years post the launch of IPO, LIC would need to further dilute equity worth ₹39,000 crore, as per current valuation. And within another three years, it would need to dilute equity worth ₹90,000 crore. The question is, given the current lack of depth in the Indian capital market, would future equity of LIC be able to fetch valuation at par, or higher than, its launch price? How would the market react to getting flooded with more LIC equity, two years from now?

In case further dilution of equity by LIC does not appear conducive, the only respite may come from Section 19A Clause (6) of the Securities Contract (Regulations) Rule 1956, which states- the central government may, in the public interest, exempt any listed public sector company from any or all of the provisions of this rule.

In mid February 2022, when LIC filed the draft red herring prospectus (DRHP), the market participants believed that the insurance giant would dilute 5% equity for around ₹65,000 to ₹70,000 crore. It was estimated that LIC would fetch a market cap of ₹14 lakh crore to ₹15 lakh crore after the IPO. But with the current IPO version that is much smaller, both in terms of valuation and share offering, one wonders why the government is adamant about launching LIC’s IPO? It is unlikely that the government is in dire need of funds even when it is already making new highs in terms of tax collection and revenue generation. Or is LIC IPO simply a target in the government’s ‘to-do list’ that needs to be check-boxed, anyhow?