News 275 views February 24, 2020

LIC’s Top Priorities before Hitting Dalal Street with an IPO

A recent announcement or rather one of the big surprises by the Indian Government in Union Budget 2020 was the proposal of Initial Public Offering -IPO of Life Insurance Corporation of India- or LIC. LIC disinvestment is treated to be a historic decision made by Mr. Narendra Modi. LIC will be the main contributor to the divestment of government bodies.

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Some Facts about LIC

LIC is the country’s major institutional investor and is the biggest insurer, and a leader as well in the life insurance sector both by the premium collection and number of sold policies. For the period April 2019 till December 2019, LIC was successful in collecting INR 1.37 lakh crores of new premiums which were straight a 45.5% increase year on year. Worth mentioning that in December 2019, LIC collected a new premium of INR 16861 crores. Although the insurance sector was privatized way back in 2000, LIC continues to remain the biggest life insurer in December 2019 in terms of premium collected with a gigantic market share of 70.52%. It has gained the trust amongst the policyholders as LIC is the sole insurer where the funds are absolutely secured. LIC is also known as the investment giant that experienced a 291% jump in the income that has come from investment between financial year ending 2009 and 2019, within 10 years’ time period. A recent data (from the Annual Report as of 2018-2019) reflects that the income from its investments raised to INR 221573.72 crores at the of the fiscal year 2019.

LIC Disinvestment perspective

LIC disinvestment is prearranged and a strategic plan of the Ministry of Finance with a target of INR 1.05 lakhs for disinvestment for the financial year 2019-2020. LIC disinvestment will help the Government to carry out certain critical economic activities easily which they were trying to achieve in the past but the main aim is to bridge the fiscal deficit gap.

Top Priorities by LIC

Keeping the above significant move in mind, Life Insurance Corporation in India has established four key primacies before hitting the Dalal Street with its LIC. These are namely:

Spreading the correct insight
Correct valuation or pricing
Ending the fiscal year 2020 on a high note
Other factors

Let us see in brief the above aspects.

1. Spreading the correct insight

With the news of LIC disinvestment, the rumour that has wrongly spear out is the privatization of LIC, which is untrue. LIC wants to clear this misconception as the Indian Government will be divesting a part of its share in LIC, in a similar way when the same strategy was applied in few public sector banks in the past. The percentage has not yet decided and the same will not be more than 10%. If there was a proposal for privatization of LIC, then the government’s share needs to be below 51% and currently, that is not true.

2. Correct valuation or pricing

This is the 2nd priority that LIC will focus on to have the correct valuation. Presently, the total assets owned by LIC is about INR 34 lakh crores. And hence, LIC has decided to appoint prudent specialized investment bankers to see its book and make a valuation of the entire property and its unseen assets to derive at the correct value. Under a normal circumstance, valuation for life insurers is usually done on the base of fixed value or enterprise worth or its new business premium or maybe at some percentage which can be 8%-10% of total AUM- Asset Under Management. But in the case of LIC, the scenario is different because of its inheritance, huge size of the assets, hidden real estate properties, and the structure of the business. The structure of the capital may also see a modification in the format as the present base of capital is just about INR 100 crores as compared to its total assets worth more than INR 32 lakh crores. The government of India would need to raise the paid-up capital to push fresh capital or a completely new issue of capital to be made to the public.

3. Ending the fiscal year 2020 on a high note

Last but most important priority set by LIC, before its IPO, is ending the financial year 2019-2020 on a high note. Despite the difficult economic scenario overall, LIC, with its 70% share in the market, was successful in generating the highest total valuation in surplus of INR 52214 crores for the fiscal year 2018-2019 and this figure was 10% greater than the previous year. Hence, LIC is focussing to end the financial year 2020 with high numbers.

4. Other Factors

Additionally, certain statutory changes like dividend payment, guarantee, etc. also need to be done which needs approval from the Parliament as well as the insurance regulator. The reason being that LIC is a state-owned enterprise governed by the LIC Act, 1956. The disinvestment process and following IPO will need permission from the Parliament. And after it passes through the LIC Board and the insurance regulator and will go for the final go-ahead from SEBI.

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