'Safe Haven' LIC IPO: Why Did the Government Cut Valuation by Half?

"Mother of all listings" or "mother of all scams"? We explain why the government cut LIC IPO's valuation.

While some have called the Life Insurance Corporation of India (LIC) IPO the "mother of all listings", the Centre seems to have sensed the "uncertain mood" of the market, for it has nearly halved its valuation and cut the size of the issue by one-third.

The LIC's IPO holds the key to the Centre's plan to meet its disinvestment targets of Rs 21,000 crore from its previous aim of garnering Rs 60,000 crore, a big step down from its curtailed targets. And yet, it is going to be the largest ever IPO listing in India.

However, the government's move has been questioned, with Thomas Isaac, former finance minister of Kerala, calling it the "mother of all scams."

Meanwhile, Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey said on Wednesday, 27 April:

"This IPO was considered unthinkable for a long, long time. LIC was always an investor. And today, LIC is coming before investors to get invested in. It's a great Indian story."

Tuhin Kanta Pandey, DIPAM Secretary

But then why did the government cut the valuation by half? How much impact has the Russia-Ukraine war had on this? And finally, should you invest?

Why Did the Government Cut Down LIC IPO's Valuation?

LIC announced on Wednesday that it has fixed the price band for its upcoming IPO at Rs 902-949 per share.

The central government now expects to raise up to $2.74 billion (Rs 21,000 crore) from selling a 3.5 percent stake in LIC, a move which affects its $10.4 billion (Rs 78,000 crore) asset-sale programme.

Madhavan Narayanan, a senior journalist and commentator, told The Quint, "Globally, the market is in a bit of an uncertain mood. If you look at the inflation today: Australia’s inflation has risen to 20-year highs, and India’s inflation (WPI) is double-digit. The Ukraine war is also happening, so there is a tussle over everything from ruble payment to speculation over nuclear war. Typically, this becomes more of a buyer’s market than a seller’s market."

He adds:

"Despite the reduced valuation, it makes sense for the government to have the LIC IPO for three reasons: The government will get some money anyway, it can show that they are going ahead with the reform process and privatisation, and that if you are in a buyer’s market, you could use the money for the extra expenditure you might need to control the fiscal deficit."

Thomas Isaac, however, has questioned why the government is "so desperate" to sell LIC.

In a tweet ending with the hashtag 'Save LIC', the CPI(M) leader said:

"LIC IPO was initially for 10 percent of holding; reduced it to 5 percent later; and now further to 3.5 percent. The market value of LIC scaled down from around Rs 20 to 6 lakh crore. As a result, issue size has declined from Rs 60,000 to 22,000 crore. Why is government so desperate to sell LIC at any price?"

How Much Impact Has the Russia-Ukraine War Had on This?

Narayanan told The Quint, "The Ukraine war was a big setback for the government, because it was planning to have the LIC IPO sometime in March. If you look at the current Financial Year, market rates have gone up, they are inching up, and now the government can also not borrow easily."

On being asked if cutting down the valuation was a smart move or a practical move on part of the government, he agreed with the latter, stating that "smart is a difficult word."

Meanwhile, DIPAM secretary Pandey argued on Wednesday that LIC IPO's size was right, given the market constraints, and stated that the government wanted to champion LIC as a long-term value creator in the equity market.

Pandey added that the Indian markets had recovered from the initial shocks; while global sentiments are weak, Indian markets are strong due to domestic flows and it is the only market in the world to fuel such a large public offer.

However, though the IPO will be India's biggest ever, given the size of the public sector behemoth, the government has only valued it at 1.11 times.

Thomas Isaac, comparing it to domestic insurance firms such as HDFC Life Insurance and SBI Life Insurance, currently trading at 4.05 times and 3.10 times their embedded values, has called this multiplication factor "scandalous".

Raising alarm, Isaac said in a tweet:

"Multiplication factor of 1.1 on LIC's embedded value is scandalous when factors of private insurance companies have ranged between 2.5 and 4.0. Over the envelope calculation shows that the implicit loss from the IPO would be between Rs 26,000 and Rs 35,000. It is mother of scams."

Thomas Isaac, former finance minister of Kerala.

Meanwhile, pointing to the global economy, the impact of the Ukraine war on the world markets, and the US Fed's announcement of three interest hikes within the year, Narayanan said, "The world markets are down because of the rise in interest rates."

In view of the current scenario, he adds:

"The government cannot afford to sit on a high horse, and hence, lowering the valuation price ensures government revenue, pushes ahead with reforms and shows that the government can be practical."

On Monday, former Reserve Bank of India (RBI) governor Raghuram Rajan emphasised that the central bank would have to raise interest rates to control inflation and stated that the hikes need not be considered by politicians and bureaucrats as some "anti-national" activity.

In view of this, Narayanan adds, "Rajan, who is usually a critic of the government, has advocated for the interest rate hikes for the Reserve bank and hike in fuel prices, in order for the government to keep the fiscal deficit in check. These are ways of telling the world that we are stable, we are dependable, and that we are rational."

Will the Discounts for Policyholders Make This a Bumper Offer?

It all comes down to the company's size and history, with over 290 million policyholders.

Referring to the earnings of HDFC Bank and Infosys coming short of market expectations for Q4, Narayanan pointed out that in contrast, LIC was a "safe haven investment."

"Since LIC is a virtual monopoly with a 60 percent market share or more, it is highly unlikely that this (move) will have a reverse impact. It's not like there is a fraudster like Nirav Modi sitting there. It is a dependable public sector company and if you give it an attractive valuation, people look at it as a long-term investment, and that includes policyholders who are being wooed by the government," he added.

Notably, 10 percent of the offer size has been reserved for policyholders and 0.7 percent for employees. Additionally, LIC will also offer a discount of Rs 60 for all policyholders and of Rs 40 for employees and retail investors, making it a bumper offer.

In view of this, Narayanan told The Quint, "The government wants to make this a success story on the back of policyholders. LIC falls into the blue-chip category, and it is widely believed that it will zoom into the NIFTY, because of the huge size of the company."

"LIC share is almost like buying a bond in some ways and a good share is better than an average bond."

Madhavan Narayanan.

Despite the reduced valuation, the IPO remains India's largest ever. And yet the major step down from the government's ambitions for the IPO would be a challenge to its fiscal balances since the disinvestment process is aimed at replenishing the public coffers that were drained by the pandemic.

Niraj Shah, Markets Editor at BloombergQuint, had earlier told The Quint, "The pricing is a Catch-22 situation because it’s a public sector undertaking. If they overprice it, the market may not like it or if they underprice, people might say that the family jewels are being sold cheap...the Ukraine crisis, US Federal Reserve hikes and the inflation in India are already turning down the mood right now."

Dismissing concerns about the new valuation, Pandey stated on Wednesday, "Valuation (previous) reported was speculative. It is neither being undervalued nor overvalued. The valuation process is a discovery process. Its embedded value is difficult to decipher even for us. This (3.5 percent for Rs 21,000 crore) is a fair and attractive valuation."

LIC's IPO will open on 2 May for anchor investors and from 4 May to 9 May for the general public.