The LIC IPO STORY

Kudrat Bains

20010207

BALLB 2020 Sec A

Introduction
The LIC was established under the LIC Act of 1956 with the aim to provide security to the
citizens of India through life insurance providing fair and reliable monetary compensations to
a fiscally insecure population. In it’s initial years, the LIC only received 5 crores initial
capital whereas all other expenses were covered by it’s policyholders, making them the risk
capital providers for most of the company’s expansion.1 The company, till fairly recently,
followed a mutual business model wherein shareholders of the company were also members,
and thus resulting profits were fairly distributed without external allocation of funds, this
form of organisation went through a dramatic shift post the amendments to the Finance Act in
2021 wherein the government pushed for it’s rights over LIC as a stakeholder, in their bid to
disinvest. The 2021 amendments came as a result of the Finance ministry’s target of
disinvesting a whopping 2.1 lakh crores in PSUs in 2021, following which the February 2020
Budget declared LIC’s public listing.
The LIC IPO was set to be one of the most anticipated stock exchange listing poised to
become the largest Indian IPO at an issue size of 21,000 crores, it was originally issued at a
cap price of ₹ 949 per share, but on it’s debut at the stock markets, the IPO opened at ₹872
on NSE and ₹867.20 on BSE, with a low of ₹860, a 9% discount.2 How and why this
undervaluation happened, especially at such a late stage in the IPO process is something that
is a matter of public and legal concern

The context
2021 was a big year for the Indian IPO market, 63 companies opened for IPOs and it toto
managed to raise 1.2 lakh crores, making it the highest ever single year IPO amount, however
by 2022 the IPO wave was coming to an end. Additionally, the Russia-Ukraine turmoil had
taken a toll on the market, and inflation was on the rise, India was dealing with an enormous
loss of foreign institutional investment, and a depreciating rupee was creating an unstable
IPO market. LIC’s Draft Red Herring Prospectus offered 5% of the company’s post issue
paid up share capital, which was later reduced to 3.5%, a move that would not be allowed
under normal circumstances under Schedule XVI of the ICDR, however SEBI gave special
permission in this case, considering the size and gravity of the IPO taking place on time.3

1
https://theleaflet.in/lic-ipo-how-is-it-the-biggest-privatisation-scam-in-india/
2
https://www.livemint.com/market/ipo/why-lic-ipo-proved-to-be-a-wealth-destructor-for-investors-
11663547612908.html
3
https://indiacorplaw.in/2022/05/amendments-and-relaxations-to-pave-the-way-for-the-lic-
ipo.html#:~:text=The%20LIC%20Act%2C%20along%20with,in%20preparation%20for%20its%20IPO.
The Legal Issues
A number of issues of legal concern were brought up during the entire LIC IPO saga, starting with :-

Reservation for Policyholders

Ideally, as per ICDR rules (Issue of Capital and Disclosures Requirements), companies can
make reservations and also provide discounts for employees for issuing shares in IPOS,
however, LIC through a special provision in it’s DRHP, provided reservation for all its
members aka it’s policyholders. Through this provision, LIC was able to put aside 10% of it’s
offer size for it’s policy holders, and additionally, depending on the conditions, policy holders
were also allowed discounted shares from the original offer price or price band. This move of
the LIC was unprecedented, and makes them the first company to provide this form of
discount of reservation, it begs the question however—under what law were they able to pull
this manoeuvre?
The answer to which is found on page 253 of the RHP, which cites Section 5(9) of the Life
Insurance Corporation Act, 1956, which was conveniently amended in September 2021, six
months before filing the RHP, allowing for these provisions in order to garner greater
interest, which states the following:-
“Notwithstanding anything contained in any other law for the time being in force—
(a) regarding various categories of persons in favour of whom an issuer may make
reservations on a competitive basis, in relation to a public issue, the Corporation
may, at any time during the period of five years from the commencement of section
131 of the Finance Act, 2021, make a reservation on a competitive basis, to an extent
of up to ten per cent. out of the issue size, in favour of its life insurance policyholders
as one of the reserved categories for such public issue:
[…]
Provided also that the policyholders in favour of whom reservation is made under
this sub-section may be offered shares at a price not lower than by more than ten per
cent. of the price at which net offer to public is made to other categories of
applicants;”4

Company Status
Additionally, further amendments of the Finance Act and LIC rules in 2021 brought out
another interesting nuance—the LIC is not a proper registered company as per the companies
act, 1965 or 2013, it is defined under the LIC Act as “a body corporate, having perpetual
succession and a common seal with the power to acquire, hold and dispose of property, and
capable of instituting and defending legal proceedings”, which technically only produces it as
a corporation under it’s own institutional statutory framework, but not necessarily as a
registered company, an issue that gets addressed within the next amendment.

SCCR Amendment
4
https://indiacorplaw.in/2022/05/amendments-and-relaxations-to-pave-the-way-for-the-lic-
ipo.html#:~:text=The%20LIC%20Act%2C%20along%20with,in%20preparation%20for%20its%20IPO.
Prior to 2021, rule 19(2)(b) of the Securities Contract Regulations Rules, 1957 stated that
companies were required to list out a minimum of 10% of their post issue capital in the first
instance, and to increase public shareholding to 25% over a period of three years, an
amendment through the addition of a sub-clause, allows for large-scale unlisted companies
(paid up share capitals over 1lakh-crore), proviso that public shareholding must become 10%
within 2 years and 25% within 5 years.

The Policy Issues

Undervaluation
Most insurance companies use a multiplication factor method to determine it’s offer price,
The embedded value (EV) for LIC was conducted by Milliman, who was criticised for
omitting LIC’s assets in it’s valuation, which is speculated to have raised value by multiple
lakh-crores. More importantly, LIC is said to have been highly undervalued considering it’s
massive market share (75% market share, 2/3rd in terms of value of premium)5, the
multiplication factor used for its EV valuation was 1.1, as compared to most private insurance
company’s 2.5 to 4 which it was originally supposed to follow, applying the average multiple
for private companies, LIC should be at ₹ 14 trillion, whereas it’s IPO valuation is nearly
60% below this figure.6
The fact of it’s undervaluation has been established, and even brought up by the opposition,
but how does it affect the public? Ahead of the 2021 changes to the organisational set-up of
the LIC, in the earlier mutual business set-up, 95% of the profits from the consolidated
corpus went to policy-holders since they were the risk takers, the new amendment shifts the
risk borne surpluses away from policyholders to the shareholders, meaning that now the
entirety of the profits shall go only to shareholders.7 This is particularly problematic
considering the history of the organisation, and the mutual mode through which it has
amassed it’s wealth from. Additionally, 71% subscriptions for the IPO came from domestic
mutual funds, meaning that the majority of those with interest or stake-holders, and the
original offer was oversubscribed by the shares reserved for policy holders by nearly 6 times
and the employee portion by 4, making it clear that the major portion of interest or stake-
holders in LIC were both directly and indirectly, middle-class retail investors.8 The low
valuation, to begin with, strips the government of the income it was trying so hard to bring
through it’s disinvestment initiative, the IPO was expected to garner 50 to 70,000 crores in
revenue where it was only able to ₹ 21,000 crores through the equity dilution, which doesn’t
even begin to make a dent in aiding the fiscal deficit targets for the year. Additionally, the
valuation also deprives it’s policyholders their rights, and hands them over to the private
player shareholders who have not dealt with any of the risks the shareholders have. The
5
Sarah Thanawala, LIC IPO: How is it the biggest privatisation scam in India?, THE LEAFELET (May 13,2022),
https://theleaflet.in/lic-ipo-how-is-it-the-biggest-privatisation-scam-in-india/
6
Krishna Veera Vanamali & Nikita Vashisht,Is the government undervaluing LIC for its IPO?, BUSINESS
STANDARD (April 28, 2022, 9:03 AM), https://www.business-standard.com/podcast/companies/is-the-
government-undervaluing-lic-for-its-ipo-122042800074_1.html
7
Thanawala, Supra note 1.
8
Mitali Mukherjee, LIC IPO Saga: A Disappointing Process from Start to Finish, THE WIRE (May 17, 2022),
https://thewire.in/business/lic-ipo-saga-a-disappointing-and-lousy-process-from-start-to-finish
reality is that a large chunk of domestic investors, whether voluntarily or as a result of their
mutual fund schemes, will be invested and tied into this undervalued LIC IPO debacle, in
which small investors will get dealt the harshest blows.

International Pressure
Speculation has led to the belief that foreign investors have been able to pressurise the
government into providing the steep discounts it did, particularly the anchor investors which
included the likes of the “Government of Singapore, Government Pension Fund Global, BNP
Investments LLC, Monetary Authority of Singapore and Saint Capital Fund”,9 the deplorable
global market conditions also contributed to the issue, with CPI-M’s Sitaram Yechury calling
the LIC devaluation a “scam of gigantic proportions”, stating “LIC has been the biggest
contributor funding the development of India's infrastructure. Since 1956 it contributed ₹
35L Cr. Now these funds would be placed at the disposal of predatory foreign fund managers
who seek private profit maximisation in stock markets of the world.”10

Conclusion
The LIC IPO saw various institutional bodies come together to ensure it’s timely listing, with
high expectations of hefty returns, the IPO left many small time-investor disappointed and
insecure. The government made a whole slew of amendments to existing to policy in order to
reach their disinvestment target through this manoeuvre which failed them miserably. In toto,
the LIC was a premiere institution providing security to millions, this move may have greatly
filled the pockets of a few, but it is most likely coming at the expense of many others.

9
Id
10
PTI, Left opposes LIC IPO, alleges 'scam', 'sell off', THE ECONOMIC TIMES (April 28, 2022, 6:44 PM),
https://economictimes.indiatimes.com/news/politics-and-nation/left-opposes-lic-ipo-alleges-scam-sell-off/
articleshow/91153522.cms