Speculation in the news that the Central government is starting the process to launch the Initial Public Offer (IPO) of Life Insurance Corporation (LIC) has ignited discussion in India’s financial markets. The LIC, wholly owned by the government and founded in 1956, holds the largest share in India’s insurance sector.
Understanding an Initial Public Offering (IPO)
An IPO refers to the act of offering a company’s securities to the public within the primary market. This categorization of capital market handles the issuance of new securities. Contrary to the secondary market where existing securities are bought and sold, also known as the stock exchange, the primary market signifies the birthplace of new securities.
The process allows an unlisted company to make fresh issues of securities or propose a sale of its existing securities to the public. Following an IPO, the previously unlisted company gains entry onto the stock exchange. New and medium-sized firms typically employ this approach when in need of funds for business expansion and growth.
The Potential Impact of LIC’s IPO
If actualized, LIC’s IPO could potentially mark the largest in Indian capital markets given its size and scale. In the fiscal year 2018-19, LIC’s total assets achieved a record high of Rs. 31.11 lakh crore. This move would also see the government request an exemption related to the LIC IPO from the Securities and Exchange Board of India (SEBI).
Potential Benefits of LIC’s IPO
As per S&P rating agency, the probable IPO could help address India’s fiscal deficit—expected to rise to 11% of GDP in FY21 from 7.8% in FY20. Additionally, it would provide transparency into LIC’s affairs since timely updates about market-related developments would be required. Retail investors could also benefit from the opportunity to participate in the wealth creation of LIC.
Concerns Surrounding LIC’s IPO
One of the issues facing LIC is a considerable volume of non-performing assets currently within its portfolio.
Moving Towards the IPO: A Historical Insight
The move towards an IPO was hinted at in 2020-21 budget, wherein the government announced plans for both the IPO of LIC and a proposal to sell government equity in IDBI Bank via stock exchange. The government anticipates the potential to raise Rs. 90,000 crore through stake sale in both organizations, with further Rs. 1.2 lakh crore through other disinvestments. This won’t be the first time that the government has utilized an IPO. In 2017, shares of General Insurance Corporation and New India Assurance were listed through IPOs.