Prime Minister Narendra Modi’s government plans to sell a 5% stake in Life Insurance Corp. of India and must raise about $7.96 billion to help fill a gaping budget deficit. Even at a scaled down version of its original blueprint, which at one point aimed for more than $10 billion, the offering could be a hard sell.
Landing the listing, which is slated for next month, will test the nation’s capital markets at a time when about $5 trillion has been wiped out from global equities. Domestically the situation is also rocky: Foreign funds have pulled money from India’s stocks for more than four consecutive months and local investors are smarting from losses on another high-profile IPO last year.
“I think LIC is a very good IPO but it may not be the right time for it,” said Basant Maheshwari, the co-founder of Basant Maheshwari Wealth Advisers LLP.
Anticipation is high for LIC’s listing. Some bankers have called the IPO India’s Aramco moment, referring to the Gulf oil giant’s $29.4 billion listing in 2019 — the world’s largest. But preparing the sale of a 65-year-old insurer regularly pressed into service to rescue banks and floundering state assets has been halting from the start.
The IPO has been postponed by about a year since finance minister Nirmala Sitharaman announced the project in 2020. And as with Aramco’s listing, India will need bulky commitments from anchor investors, who will raise about a third of the total money.
A further 35% –based on the estimated valuation — will be sold to millions of retail investors. That’s a challenging ask considering last year’s performance of digital payments provider Paytm, which managed to oversell its retail book by 1.7 times compared to a 2.8 times over-subscription for its institutional investors. By comparison, LIC’s retail book will be 12 times larger.
The country’s latest goalpost falls on the lower side of earlier estimates for the IPO, according to people familiar with the matter. Last month, the government had planned to raise about $5 billion to $13 billion from the listing, the people said. But as the euphoria died down and global markets started to waver, officials scaled back their ambitions.
Convincing deep-pocketed global investors of LIC’s financial might will take finessing, people familiar with the conversations said. For most, LIC is a black box: Its balance sheet is made public only once a year.
An $8 billion listing for LIC equates to nearly half the total amount raised last year from IPOs. With that big of a swing, the more than 40 companies that have filed plans for share sales in 2022 may struggle to compete.
More broadly, markets suffered a swift decline in recent weeks after raising a record $18 billion through share sales in 2021. This month, the country slashed its assets-sale target to 780 billion rupees ($10.4 billion) in the year through March 31, less than half of its earlier target of 1.75 trillion rupees.
About one third of new listings on the BSE sensex Index are trading below their offer prices. Paytm — which raised $2.5 billion in November, the country’s largest IPO at the time — has sunk nearly 59% since its debut, leaving many investors deep in the red.
To overcome a tough market, LIC is banking on its 1.3 million agents and more than 250 million policyholders to get to the finish line.
Retail investors opened a record number of new demat accounts last year, taking total equity investors to 81 million, a large enough figure for the IPO to do well. A stellar listing could add a jolt of momentum at a time when the country is yet to climb out from a wave of omicron infections and lockdowns.
“It is very important for India to push forward on listing LIC,” Tom Masi, the co-portfolio manager of emerging wealth strategy at US-based GW&K Investment Management, said in an interview with Bloomberg. “This IPO will guide the government on the next steps that they need to take to be a viable global financial market, which has foreign investors.”
For Modi, who is focused on elections in India’s bellwether state this month, maximum retail participation in LIC is an important barometer for success. The government has offered to pay a 0.35% brokerage on allotment to retail investors. It’s also set aside as much as 10% of shares for LIC’s policyholders and may offer the shares at a discount.
“It has to be priced in a manner that people can make money,” said Maheshwari. “If only the issuer makes money, then the long-term implications of this IPO will be bad.”
Ultimately, the IPO could bring more accountability and transparency to equities, according to Mark Matthews, the head of Asia research at Bank Julius Baer & Co. “When China Life, the largest Chinese insurance company, was listed in 2004, its shares rose as well as the rest of the sector,” he said.
And as investment opportunities dry up in China, at least for the time being, the IPO may offer just the right chance for large global funds to park their cash in India — a country that, for many years, lagged behind other major economies.
“We do not currently believe that any other equity market offers the investment opportunity that India offers in the next 20 years,” Masi of GW&K wrote in a joint email with Nuno Fernandes, another portfolio manager. “Favorable demographics, a large population base, low per-capita income and growth minded economic reforms are being implemented.”