From restructuring the allocation buckets to getting pricing for retail and QIBs/HNIs right, the govt can do many things to make it a game-changer
I had proposed a retail-focus approach for the LIC IPO (bit.ly/2YpBUqx). Here are some specific suggestions.
Restructure the allocation buckets
The IPO should have anchor investors (with 10% reservation) as they provide a significant comfort on pricing. The allotment to them should be at their final bid price.
Increase the retail bucket from 35% to 60%. Within this, 15% should be reserved for the LIC family: 29 crore policy holders, 1.15 lakh employees and 15.50 lakh agents. Earmark 20% for first-time investors (new demat accounts); LIC can be an excellent vehicle to get new investors into the equity market. The balance 25% can go to the general retail investors.
Furthermore, earmark 25% of the issue for QIBs. Of this, reserve 10% for domestic institutions. This should include the long-term pension funds of NPS that now allows IPOs. The balance 15% may be reserved for other QIBs. Finally, only 5% should be kept for HNIs, as the majority of them, with IPO financing, only chase listing-day gains and distort the market. If the retail bucket does not get adequate response, it would not impact the issue as the undersubscribed portion is allowed to be allocated to the QIBs.
If the 60% retail bucket is not pursued, more than 35% should surely be considered. Otherwise, clawback should be introduced, as used in some jurisdictions. Under this, if the retail portion is oversubscribed, under a formula, shares from the QIB bucket are transferred to retail. So, if the retail portion, for example, sees a 2X subscription, the retail tranche increases by, say, 10% (to 45%).
Pricing for retail
In pricing, the government should leave enough on the table. It should recognise that when the share price goes up post-listing, it will benefit the most, with 95% of the shares in its hold.
For retail, a 10%-discount on the anchor investors’ price should be offered at a fixed price. The present 5% discount can disappear in a matter of days given the volatility of the market. Even if quick monies are to be made, let these be by the man on the street. If necessary, to prevent flipping, a one-month lock-in may be prescribed. Consider this discount as wealth created by public enterprises being rightfully shared with the public. There would be no criticism as allotments shall be made to anonymous small investors. Significantly, LIC must sustain the trust behind its name. In trying to maximise IPO price, it can dent it. Moreover, a negative performance post-listing shall see a flood of bad press, with an adverse impact on its insurance business. Future dilutions may also get adversely impacted.
Pricing for QIBs/HNIs
There should be a price band of 20%, with the anchor price being the base. Even better would be to have no upper price band at all; let the intelligent QIBs, through a closed auction, bid at any price above the anchors’ price. Allotments in both scenarios should be on highest price downwards basis. Many long-term QIBs would like to acquire large quantities and hence be willing to pay a premium on the anchor price, as any bulk purchase later from the market can lead to big spikes in the price. This way, the government shall also benefit from larger inflows, offsetting the discount to retail.
Publicise in advance
The new pricing and allocation schemes should be finalised soon and widely publicided ahead of the IPO. Banks and LIC agents should be incentivised to aggressively get new demat accounts opened.
LIC could do an FPO (of 5%), say, six months later. In this, a suitable reservation should be made for investors who had not got allotments in the IPO and to new demat accountholders then, offering them a 10% discount on the market price. This would expand the investor base even further. Subsequent dilutions should also be planned accordingly.
Go ahead…at the earliest
Given the market conditions, today would have been the perfect time for its launch. Yet, the IPO is still a few months away. It must not be postponed, even if the market exuberance evaporates. The government should not just wait for the markets to bounce back. There is never a bad time for a good investment.
A friend, S Ramesh of Kotak, suggested that the LIC IPO opening date may be made the National IPO Day. I couldn’t agree more. With a well-designed offering, it can be the perfect 75th year of Independence gift to millions of small investors.
The author is Founder-chairman, Prime Database