The long-awaited forthcoming LIC IPO presents a momentous opportunity for the government to expand our capital market, and significantly so.
This would, by far, be the largest IPO ever, estimated by some at about Rs 60,000 crore, at 5% dilution. The largest IPO till now has been of Rs 15,199 crore, incidentally of a PSU, Coal India. (In fact, four of the five largest IPOs ever have been from PSUs.)
Instantly, the LIC IPO size does appear to be daunting, but that is only in relation to the past IPOs. Important to consider, however, are the amounts poured in by investors … Reliance Power stands tall with an IPO collection of Rs 7.12 lakh crore, followed by Coal India (Rs 2.34 lakh crore), Zomato (Rs 2.12 lakh crore) and Mundra Port (Rs 2.04 lakh crore). When investors have put such large sums into loss-making or greenfield companies, a much better fate surely awaits LIC, a profit-making, dominant industry player, in fact, a household name. By the way, the 10th company in the ranking is Avenue Supermarts, which, at Rs 1.37 lakh crore, had a collection of more than double of the proposed LIC IPO.
There is, as such, no need for anxiety or developing cold feet. Moreover, the bugbear that large, or many IPOs, suck liquidity from the secondary market and cause a slump has also been demolished several times, and even presently. In perspective, the LIC float would be a meagre 0.5% of the total free floating stock of Rs 110 lakh crore of all listed companies.
If the equity cult indeed needs to be spread, the LIC IPO should be designed accordingly. IPOs have always been the preferred route for small and new investors. The key focus for LIC should be retail. We all keep moaning about the small allocation made by households of their savings to the capital market. But have not done much about it. With the current regulations allowing 10% dilution in IPOs, offering to the retail is a meagre 3.5% of a company’s capital, and in case of 5% dilutions, it goes down to a minuscule 1.75%. With huge oversubscriptions, small investors either get a refund or a measly allotment, putting many off from further investing and pushing them to the riskier secondary market.
Though the proceeds shall provide much-needed monies to the government, the focus of the LIC IPO should primarily be the expansion of the investor base, and dramatically so. That is also what the manifestos of almost all political parties state. Even the Vision and Mission Statements of the Department of Investment and Public Assets Management proclaim “Promote people’s ownership of CPSEs to share in their prosperity through disinvestment.” LIC can, in fact, become a leading example of what I call as public participation in public enterprises (PPPE).
The LIC IPO shall address the grave scarcity of good listed companies which causes excessive speculation and volatility. A focused retail policy will have a major positive impact: a very wide distribution reduces post-listing selling pressure. Moreover, many new retail investors would get a taste of equity, incentivising them for further investing. The retail orientation shall also be advantageous politically; what better opportunity to please millions!
The long-standing argument of some vested interests that the retail market is shallow and cannot absorb large offerings is also a bogey. Data shows that we should not underestimate the investors’ appetite for what, at a particular point of time, appears as a good investment. Just one example will suffice: Rs 39,919 crore were put in by retail in Reliance Power’s IPO, and that too 13 years ago.
Even by the number of retail applications, high numbers have been witnessed. Reliance Power has again led with an extremely high number of 46.23 lakh, followed by Glenmark (33.95), Devyani (32.67) and Rolex Rings (30.74). Importantly, the last three IPOs are of 2021, showing a growing interest of retail in the IPO market. This clearly suggests that if a company and its price are attractive, a very large investor base is available. The appetite is indeed infinite. LIC should set out to overhaul all records.
For some specific suggestions, read the concluding part of this article tomorrow.
The author is the founder-chairman of Prime Database