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LIC IPO Saga: A Disappointing Process from Start to Finish

The biggest test will be how LIC stock performs over a longer period. On that, there may be further disappointment if earlier state-owned IPOs are anything to go by.

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A few days before it listed, tweets around the Life Insurance Corporation of India’s initial public offering seemed to give the story away.

Sample this: “Heard some people are praying that they shouldn’t get allotment in LIC IPO!”

That’s exactly what some stock market enthusiasts must feel on LIC’s debut. For others who got allotment, the mood is sombre.

One of the government’s largest stock market offerings has had a dismal day one. Grey market rates consistently indicated the stock may list at a discount on day one. In the end, LIC debuted on the stock exchanges at Rs 865/share, a discount of 9% against the issue price of Rs 949 per share.

Despite local funds ‘helping’ the stock stay afloat, there was intense selling pressure right from the start, only briefly touching the Rs 900 mark. LIC finally closed at nearlu Rs 873. Adding salt to injury was the fact that the stock market had a decent trading day and the Nifty actually rallied and ended higher by over 400 points. Can’t even blame the big bad global markets today.

Like a bad soap opera that refused to give up, the LIC IPO saga has dragged on forever now. Prime Minister Narendra Modi’s government has raised $2.7 billion by selling shares in LIC to new shareholders and millions of families nationwide that hold LIC policies. Subscription had a decent showing. The offer was oversubscribed nearly three times. In fact, policyholders placed bids for over six times and the employee portion received orders for four times the shares reserved for them.

The carefully tracked anchor portion of the IPO included the Government of Singapore, Government Pension Fund Global, BNP Investments LLC, Monetary Authority of Singapore and Saint Capital Fund. But bear in mind that more than 71% was subscribed by domestic mutual funds at the upper end of the price band (Rs 949 per share) for the IPO. SBI Mutual Fund, ICICI Prudential, SBI Life Insurance, Aditya Birla Sun Life, Axis Mutual Fund, HDFC Trustee, Nippon Life, Kotak Mahindra Life Insurance, L&T Mutual Fund, Tata Investment Corporation, UTI Mutual Fund, Sundaram Mutual Fund, IDFC MF, Bajaj Allianz General – name the fund and they’ve been subscribers. Which means that the bulk of those who have an interest and stake in LIC, directly or indirectly, are middle-class retail investors.

I will not delve into the shaky financials of LIC because enough has been written about it. However, I will bring a bit of history back into this listing. Indeed, the country’s largest institutional investor and the largest insurer, LIC is the market leader in the life insurance industry both by premium collected as well as number of policies sold. But what’s the real story behind LIC? Till the year 2000, LIC enjoyed a complete monopoly. Interested buyers would reach out themselves. LIC functioned through a massive army of agents. Close to 10 lakh active agents exist for LIC, by some industry estimates.

Private players had a late start, but like most lean and hungry private machines, they made up for lost time with aggressive marketing and an extremely focused outreach. They had neither a customer base nor a web of agents. So they directed the bulk of their efforts through banks they were allied with – for instance, HDFC Life Insurance pushed its products through HDFC Bank. Same for SBI Life. Ironically, even with potential access to a huge universe of PSU banks, LIC did nothing.

Today, private insurance companies today hold over 80% of the top end market that’s been made accessible through bank outreach strategies. In a scenario where 50% of insurance industry contribution comes from banks, LIC neither participates nor tries to garner that market. Ninety-seven percent of its business comes from agencies and a measly 3% from banks. Agents themselves are a failing mechanism, with very poor conversion and earnings potential. As an industry watcher pointed out, the agents are worse off than Uber and Ola drivers. With no access to the higher economic strata and a lack of novel products to pitch, this massive pool of agents is now a beast of burden for LIC.

Let’s move to some of the armchair arguments of defence that were presented ahead of LIC’s listing and to anyone criticising the need to list this insurance behemoth. Number one, the government did what it had to. Number two, you can’t time the market and you can’t keep waiting. Number three, funds are needed for the economy, we can’t raise taxes and our options are limited. Let’s take them all on.

Struggling to meet her government’s disinvestment target, in a surprise move the finance minister announced in the February 2020 Budget that LIC would be listed on the stock exchanges. The expectation was, selling part stake in this insurance giant would raise enough funds to meet the equally tall divestment target of Rs 2.1 lakh crore for the Modi government in FY21. Since then, divestment targets have been slashed year after year. The initial expectation was that selling partial stake in LIC would raise anywhere between Rs 50-70,000 crore. What has the government now raised? A 3.5% equity dilution has been done for Rs 21,000 crore.

This year’s Budget set a fiscal deficit target of 6.4% of gross domestic product (GDP) for the current financial year. IMF estimates India’s general government fiscal deficit (states and Centre combined) will hit 9.9% of GDP for FY23 as rising energy and food prices will put renewed pressure on the fiscal gap. Will Rs 21,000 crore cut any ice at all with that figure? Who are we kidding here? Who decided to chop and scale this issue into a devalued formless creature that is now listing on the bourses?

On the second point of ‘you can’t time the market’, the answer is, yes you jolly well can. The year 2021 was a bumper period for the Indian primary market. Sixty-three companies collectively raised Rs 1.2 lakh crore through initial public offerings – it was the highest amount ever raised in a single calendar year. Leave aside for a moment their blind greed. Companies like One97 Communications (Paytm’s parent company), Zomato and FSN E-Commerce Ventures (beauty e-commerce platform Nykaa’s parent) did exactly that. They read a raging bull market for what it was and decided to strike while the iron was hot.

Reports indicated that when the LIC IPO was considered in 2021/early 2022, foreign anchor investors seemed reasonably keen. Why didn’t the government capitalise on that interest? Did the finance ministry not see the opportunity at that point, or was it a different problem? Was it that presentations abroad and meetings for pre-IPO placement did not garner the expected reception? Was it that the constant scaling down of size was a consequence of poor feedback and low enthusiasm?

Number three, funds are needed. Agreed. Taxes can’t be raised – no, but they can be lowered. Why isn’t the government stepping in with fiscal support for an inflation situation running wild? Reduce Central duties on petrol and diesel, cut import duty rates to tame inflation. Do what needs to be done. But don’t wring your hands and say, there was no choice, so we’re divesting a public sector company that has been a non-starter for years.

There’s another problem here and that relates to legacy. The biggest test will be how LIC stock performs over a longer period. On that, there may be further disappointment if earlier state-owned IPOs are anything to go by. Coal India Ltd, General Insurance Corp. (GIC) and New India Assurance were listed in 2017 and have been the worst performers, trading about 75% below their IPO prices. There is a track record with these public sector companies, and it isn’t pretty.

Which brings us to the question many have been asking me on Twitter. I got allotment, now what. At this point, what LIC has going for it is size. Post listing, the state-owned insurer will become the fifth-largest company in India with a valuation above Rs 6 lakh crore. Only four stocks, Reliance Industries, TCS, HDFC Bank and Infosys, will have more capitalisation. So it will always be around, in indices, in ‘pick a stock’ mentions – but as Coal India Ltd has shown us, that means little.

Analysts are also pinning their hopes on the fact that passive indices tracking India will include LIC in their baskets. The advice is ‘hold for the long term’. My questions to them are these: Can you define long term? What do you see changing for LIC’s business prospects over the long term? Would you buy this stock or subscribe to this IPO with your own money, at this price?

Paytm was a ‘Reliance Power’ moment marking the beginning of the end to an overheated, out of whack primary market. LIC brings things full circle. It is a confirmation of the fact that IPOs are the most manipulated and tricky tools where promoters egged on by investment bankers play a roulette wheel; how much can I squeeze out of subscribers while selling them a lemon. The tragedy is this. Most domestic investors will end up being part of the LIC saga. Whether it was an active choice to have subscribed or it was a fait accompli, thanks to the mutual fund schemes they invest in.

India is currently seeing an inflation and food shock, huge foreign institutional investment outflows, a sliding rupee, and a war in Europe that shows no signs of ending. That makes for deeply nervous stock markets. Did all of that impact the LIC stock’s fate? Sure. But let that not distract from the fact that this was a poorly executed effort and a more than poor outcome. For which many small investors will pay the price. And that is the bitter truth.