Life Insurance Corporation of India (LIC), a government-owned entity, has recently made headlines by filing its Draft Red Herring Prospectus (DRHP) for a massive Initial Public Offering (IPO) with the Securities and Exchange Board of India (SEBI). The IPO process will involve the government unloading 5% of its total stake in LIC. Now, let’s break down the key elements behind this news for a better understanding.
Understanding LIC’s Status and Contribution
LIC is entirely under government ownership and was founded in 1956. It claims the largest portion of the Indian insurance market share. The total funds expected to be raised from the IPO could reach up to Rs. 60,000 crore. All proceeds collected will be directed towards meeting the Government’s disinvestment target for the current fiscal year.
Decoding The IPO Process
An IPO happens when a privately held company or a government-owned firm starts to raise funds by selling shares to the public or new investors. Post-IPO, the company gets listed on the stock exchange, a well-regulated market for buying and selling securities like shares, stocks, and bonds. The listed company can increase its share capital for future growth and expansion through a follow-on public offering or FPO.
The Role of SEBI in an IPO
When a company decides to initiate an IPO, it files its offer document with the market regulator, SEBI. This offer document is an essential resource providing comprehensive information about the company, its promoters, projects, financial details, the aim of raising money, terms of the issue etc. SEBI is a statutory entity formed in 1992 conforming to the rules of the Securities and Exchange Board of India Act.
What is an Offer for Sale?
In the ‘offer for sale’ method, the securities are not directly issued to the public but sold through intermediaries like issuing houses or stock brokers. Here, the firm sells securities in bulk at a predetermined price to brokers who then re-sell them to investors.
Understanding DRHP
A Draft Red Herring Prospectus (DRHP) is a preliminary legal document that acts as a key communication channel between the company heading for an IPO and its potential investors and stakeholders.
Eligibility to Invest in an IPO
The category of Qualified Institutional Buyers (QIBs) includes entities like Foreign Portfolio Investors (FPIs), mutual funds, commercial banks, insurance companies, pension funds etc. These institutional investors usually possess the expertise and the financial capacity to analyze and invest in capital markets. Every individual investing up to Rs 2 lakh in an issue are termed as retail investors whereas those investing above Rs 2 lakh are considered high net worth individuals.
SEBI’s Regulation on IPO Issuance
To safeguard investors, SEBI mandates that a company must meet specific criteria before they can approach the public to raise funds. These conditions include net tangible assets of at least Rs 3 crore, net worth of Rs 1 crore in each of the last three full years, and a minimum average pre-tax profit of Rs 15 crore in at least three of the last five years.
Last Modified: February 15, 2024