Life Insurance Corporation of India (LIC) is an Indian statutory insurance and investment corporation under the ownership of the Government of India. Established on 1 September 1956, when the Parliament of India passed the Life Insurance of India Act nationalized the insurance industry in India. Over 245 insurance companies and provident societies were merged to create the state-owned Life Insurance Corporation of India. LIC is going to issue a share Initial Public Offering (IPO) to raise Rs. 21,000 crores. It is India’s biggest public issue to date. So, Should You subscribe to this IPO, or should avoid it, let’s discuss some key points in this article you should know before making an investment decision in the LIC IPO.
Details of IPO:-
- 10% shares are reserved for the Policyholder and a discount of Rs. 60 per share is also for the policyholder.
- 15% shares are reserved for employees of the LIC and a discount of Rs. 45 per share.
- The remaining 89.85% share break-up is as follows:
- 60% of the Qualified Institutional Investors are reserved for the anchor investors and the discount of Rs. 45 per share is also for the anchor investors.
- LIC has a market share of 70-75% in terms of several policies, and 61% market share in terms of the amount of premium.
- The market share of LIC decreases YoY due to an increase in competition from the private player but is not of major concern as LIC has the potential to grow a lot after being listed on the stock exchange.
- LIC has a strong army of 13.3 lakh agents.
- Bank assurance is something where LIC is not able to create its dependency. So, it will act as an opportunity for LIC.
- LIC is also lagging in the digital world, it will also act as an opportunity for LIC to grow.
- In the Brand Strength Index LIC has got 84 out of 100, which it has a very strong brand.
- LIC is having Asset Under Management of around Rs. 40 Lakh Cr., where 25% of this AUM is an equity investment and 75% is in fixed income securities.
- When comparing to the total asset management of the whole mutual fund industry LIC has 3 lakh crores more than that. Combining the AUM of all private players in the insurance industry LIC still has AUM 3 to 4 times larger than the private players.
- The government is diluting only a 3.5% stake, but 25% is expected to be diluted in the upcoming 2-4 years depending upon the market situation.
- The insurance industry is in a secular growth trend.
- Penetration of the Insurance industry is very low, but as awareness regarding risk management has increased due to covid-19, so the penetration will increase as time passes.
- If the industry grows by 10%, the private player may be grown by 20% and LIC will grow by 11%, as the base of the LIC is too big then this growth rate can be considered a good growth rate.
- Once the company will be listed then shareholders will also drive the company to grow and increase sales.
- LIC is one of the strong companies in the financial service industry along with SBI.
- The financial will going to change in a big way as there will be a huge change in profit distribution of the company.
- There are two types of policy: Par (participative policy) and Non-par (non-participative) policy.
- In participative policy whatever is the profit of the company, a share of that will go to the policyholders. Earlier this share was 95% and the remaining 5% was given to the government and the shareholders. But now it has been changed to 90% and 10% respectively.
- In Non-Participative earlier same rule as participative but changed to 0% profit will go to the policyholder and 100% profit will go to the shareholders which include government and other investors.
- Focused is increasing more on the non-participative insurance across the industry, it will drive the actual growth.
- As the structure is changed and an increase in profit of approx. 1000 crore can be seen.
- From here on, the Profit-making opportunity for the LIC is too big.
- Prospects of the LIC excellence that is the reason for the increase in the valuation.
- It has an embedded value of Rs. 5.39 lakh crore.
- There will be time correction in the LIC because utilizing every opportunity for growth will take time.
- As of now, there is no issue in governance in LIC.
- The listing will create the platform for the company to perform better.
Types of Market?
Typically, there are 3 types of Market:
i) White: These are legally allowed markets like Stock Exchanges in India. Ex. BSE, NSE, etc.
ii) Black: Here, the illegal transactions are being carried on, it is an illegal market.
iii) Grey: Grey Market is not illegal but also it is not regulated as well.
What is Grey Market?
- The grey market premium also known as IPO GMP is information that is calculated based on the demand of a company that is coming up with an IPO.
What is Kostak Rate:
- The Kostak rate is the amount that the individual pays for the IPO application before the IPO listing.
- One can buy and sell their full IPO application on Kostak rates outside the market and fix their profit.
- The Kostak rates apply in every condition you get the allotment. Here the individual gives the money in terms of lot and not based on a number of shares.
What is Subject to Sauda:
- Subject to Sauda is almost similar to Kostak Rate, but the only difference is that Buyer will only purchase the IPO from Seller, only when he/she gets the allotment in the IPO.
- Here again, the individual gives the money in terms of lot and not based on a number of shares.
Risks in Government:
i) Unregulated Market
ii) Zero Reliability
What should the investors do?
LIC is a very strong company with great potential to grow in the future, as well as the whole insurance industry, which has great potential to grow due to the low penetration of the insurance sector in the country. As of now, the Grey Market Premium (GMP) of Rs. 65 is available in this IPO indicating a decent listing gain of 12% for the retail investors and 14% for the policyholders at the time of listing. The listing of LIC will be interesting to watch, and looking at the figure of the financial statement after the listing will be more interesting. Hence, one should closely watch this counter.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.