The astonishing scale of India’s biggest ever IPO

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India’s state-owned Life Insurance Corp., with its distinctive blue and yellow logo, is ubiquitous in the country of 1.4 billion people. LIC controls nearly two-thirds of the Indian market, with approximately 282 million policies and over 1.3 million agents, 100,000 employees, 2,000 branches and 1,500 satellite offices. Prime Minister Narendra Modi’s administration launched an initial public offering of LIC in May in what is expected to be the biggest listing ever in India and the fourth in the world this year so far. Its scale represents a unique challenge for the country’s underdeveloped capital markets and a great test of Modi’s plan to make the economy more efficient.

1. Why is the government selling a stake?

The IPO is the biggest part of a $10.4 billion asset sale program designed to fill India’s budget gap. The government plans to push borrowing to a record high as it tries to pull itself out of a Covid-19-induced downturn, and rising fuel prices force it to spend more on subsidies. It also paves the way for future sales when cash is needed – although the government said at the launch it would not sell another stake for at least a year after the debut. Moreover, by forcing the 65-year-old insurer to open its books and making it accountable to public shareholders, the government hopes that LIC will be better able to compete with more nimble and nimble private insurers.

The government began taking orders from retail investors on May 4 and the shares are expected to start trading on May 17. The IPO was scheduled to take place in the fiscal year to March 2021 but was delayed, first by the pandemic and then by the Russian invasion of Ukraine in February, which slumped the steps. The government decided to go ahead after reducing the price and number of shares on offer. It was expected to raise up to 210 billion rupees ($2.7 billion), well below its initial target of 500 billion rupees. That would still surpass India’s biggest IPO to date – the Rs 183 billion listing of digital payments provider Paytm last November.

3. How is the sale structured?

The government sells 3.5% of LIC shares. Retail investors will be allocated 35% of these shares in the offering and receive a discount of Rs 45 off the IPO price; An additional 10% has been reserved for LIC policyholders, who will benefit from a greater discount. The sale has already attracted anchor investors, including the Norwegian sovereign wealth fund and the Singaporean government.

4. Why is it so difficult to value the company?

LIC’s size and special status make it a unique challenge. It holds nearly $500 billion in assets, more than the total size of the nation’s mutual fund industry. Milliman and Ernst & Young, the firms appointed to work on the valuation, sifted through millions of policies to account for parameters such as mortalities, morbidities, late premium payments and policy cancellations. They also had to weigh the value of LIC’s real estate in its 2,000 branches. LIC only publishes its balance sheet once a year and comparisons between peers are tricky.

4. Why is this IPO important?

First, because of its size. The company would be worth Rs 6 trillion if the shares were sold at the top of the IPO range. Sales of stakes in companies so deeply rooted in the history of their nations are not commonplace. LIC has had a dominant presence in India’s financial landscape since the government of Jawaharlal Nehru combined the country’s 245 insurance companies and provident fund companies in 1956 with a mandate to offer life insurance to all strata of the society. For many Indians, insurance is still synonymous with business, even after the industry was opened up to private companies two decades ago.

5. Are there parallels in other countries?

Some bankers are describing the sale as the Indian Aramco moment. Oil giant Saudi Aramco, which staged the world’s largest IPO in 2019, was also a symbol of Saudi Arabia’s economic power, generating nearly 90% of Saudi government revenue. Japan Post, which began privatization in 2015, was the country’s largest bank deposit holder and largest insurer while running the national postal service. Like LIC, it was highly visible, with the largest chain of storefronts in Japan and a fleet of 86,000 motorcycles for mail delivery.

6. Will investors get on board?

The success of the IPO will depend on demand from local investors, as foreigners have only contributed about 20% of the anchor portfolio. LIC benefits from a 1956 Act of Parliament which gives it a special status in the industry, distinct from the law governing its newer rivals. It benefits from a sovereign guarantee of its policies, allowing it to operate with a finer capital base than that of its competitors. Yet some investors are still skeptical of the company’s ability to compete with private insurers. Over the years, it has been deployed as an investor of last resort by governments to prop up markets and bail out other public companies, such as in 2019 with IDBI Bank Ltd. assets even after it becomes a listed company.

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