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Centre may not dilute more stake in LIC for at least a year post-IPO

The Centre will sell a minimum 3.5% stake in LIC, but the final size of the IPO could be raised to 5% as proposed in the draft red herring prospectus if sufficient demand is shown by anchor investors by Tuesday.

In the life insurance industry, the real value of a company is its embedded value (EV). Thereafter, market valuation is driven by expectations of business growth.
In the life insurance industry, the real value of a company is its embedded value (EV). Thereafter, market valuation is driven by expectations of business growth.

After diluting 3.5-5% stake in the upcoming initial public offer (IPO) of the Life Insurance Corporation, the Centre will not dilute any further stake in the insurer for at least one year to give market the space to gauge the performance of the insurer and its potential value.

“Over a period of time in the listed space, LIC will display the business growth rate and improvement in margins that the market is expecting. Further growth in its value will therefore be found,” an official told FE.

In the life insurance industry, the real value of a company is its embedded value (EV). Thereafter, market valuation is driven by expectations of business growth.

The Centre will sell a minimum 3.5% stake in LIC, but the final size of the IPO could be raised to 5% as proposed in the draft red herring prospectus if sufficient demand is shown by anchor investors by Tuesday. The Centre could fetch between Rs 21,000 to Rs 30,000 crore from the issue, much lower than estimated earlier.

With weak demand for foreign institutional investors, the Centre has reconciled to a much lower valuation of Rs 6 trillion for LIC, though the state-run insurer was seen as worth around twice that amount by its owner in the Budget estimate for FY22. The valuation of the insurance behemoth is 1.1 times its EV of Rs 5.4 trillion.

However, officials reckon the promising prospect of the long-term potential for the growth of life insurance business in India, where LIC has two-third market share .

“The government is diluting only up to 5% via the IPO and 95% will still be with it. So, 95% of subsequent growth in EV will accrue to the government, which will realise a better value in subsequent stake dilution,” another official said.

LIC has a massive 300 million policyholders, most of which are participatory policies, meaning policyholders get the most of (95% now and to go down to 90%) the profits. That approach will change after listing as the insurer would enter the non-participatory policy territory (in such policies most of the profit accrues to shareholders) in a big way, which would boost its EV going forward.

LIC, which has an unmatched presence of 1.35 million selling agents across the country, will also drive business growth by tapping more institutions such as banks to sell products.

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