Context: The central government has started the process to launch the initial public offer (IPO) of Life Insurance Corporation (LIC) within this year.
More on the news:
- The initial public offer (IPO) is expected to be the biggest in the Indian capital markets given the size and scale of LIC, the country’s oldest and largest life insurer.
The size and position of LIC in the insurance market:
- Even if the central government decides to sell 5-10 percent of its equity in LIC through an IPO, the share sale of LIC is expected to be the largest.
- The LIC’s total assets had touched an all-time high of Rs 31.11 lakh crore in 2018-19, an increase of 9.4 percent.
- The LIC had realized a profit of Rs 23,621 crore from its equity investment during 2018-19, down 7.89 percent from Rs 25,646 crore in the previous year.
- The corporation had 66.24 percent market share in total first-year premium and 74.71 percent share in new policies in 2018-19.
Background of disinvestment roadmap:
- In the Budget 2020-21, the government had announced plans for IPO of LIC and a proposal to sell the government’s equity in the stressed IDBI Bank to private, retail and institutional investors through the stock exchange.
- The government expects to raise Rs 90,000 crore through stake sale in LIC and IDBI Bank, and another Rs 1.2 lakh crore through other disinvestments.
- The government had also earlier listed the shares of General Insurance Corporation and New India Assurance through IPOs three years ago.
Benefits expected through the IPO:
- An IPO will surely bring transparency into affairs of LIC since it will be required to inform financial numbers and other market-related developments on time to the stock exchanges.
- Investors can also benefit from picking up equity in the insurer, which has been making underwriting profit as well as profits on its investments.
- The corporation’s investment in various equity and bond instruments will also come under greater scrutiny after its lists on the exchanges.
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors
- it also allows public investors to participate in the offering.
- An IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges.
- Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company.
- Initial public offerings can be used to raise new equity capital for companies, to monetize the investments of private shareholders such as company founders or private equity investors, and to enable easy trading of existing holdings or future capital raising by becoming publicly traded.
- Offer for sale (OFS) is a simpler method of share sale through the exchange platform for listed companies.
- The mechanism was first introduced by India’s securities market regulator Sebi, in 2012, to make it easier for promoters of publicly-traded companies to cut their holdings and comply with the minimum public shareholding norms by June 2013.
- The method was largely adopted by listed companies, both state-run and private, to adhere to the Sebi order.
Life Insurance Corporation (LIC)
- It is fully-owned by the central government and governed by the Life Insurance Corporation Act, 1956. Every LIC policy is guaranteed by the government.
- It has the highest market share in the life insurance segment in India.
- LIC policyholders enjoy a sovereign guarantee(under Section 37 of the Act) on the sum assured and the bonus declared. This has been one of the main selling points for LIC policies.
- LIC pays 5% of its surplus to the government and the balance 95% to policyholders. Compared to this private players pay around 90% to policyholders.
- A large part of LIC's investment is in equities, bond market and government dominated instruments.
- LIC now also holds a 51% stake in IDBI bank thus making it the only insurer in India to own a bank.
- LIC is the biggest institutional investor in the Indian equity markets
- The government has used LIC on many occasions to stabilize the markets. Eg offer for sale of Oil and Natural Gas Corporation Limited (ONGC) in 2012 as a classic example of a LIC bailout.
Image Source: TH