Disinvestment: Govt begins process to launch LIC IPO

  • A notification posted by the DIPAM sought to engage pre-transaction advisors for the LIC IPO

  • The notification said that it proposed to engage up to two pre-IPO transaction advisors

New Delhi: After much deliberation, the government has finally ventured ahead and begun the process for partial disinvestment of its stake in LIC (Life Insurance Corporation) through an IPO (Initial Public Offer). A notification posted by the DIPAM (Department of Investment and Public Asset Management) on Friday sought to engage pre-transaction advisors for the partial disinvestment of the government’s equity shareholding in LIC.

The IPO plan is one of the biggest disinvestment exercises being taken up by the government in the current financial year. The Centre is expecting to raise Rs 90,000 crore from the offer. An announcement in this regard was made by Finance Minister Nirmala Sitharaman in February while presenting the Union Budget.

LIC IPO: The eligibility criteria for pre-transaction advisors

The notification said that it proposed to engage up to two pre-IPO transaction advisors from “reputed professional consulting firms/ investment bankers/ merchant bankers/ financial institutions/ banks, independently (not in consortium) for facilitating or assisting DIPAM in the preparatory processes leading to the IPO of LIC India.” It added that to qualify as an advisor for the pre-IPO deal, the bidder should have an experience of handling at least one IPO of a minimum size of Rs 5,000 crore between April 1, 2017, and March 31, 2020, or should have managed a capital market transaction of Rs 15,000 crore or more during this period.

The fee quoted by the potential advisor for the deal should be a minimum of Rs 1. The last date for submission of bids is July 13, and the bids will be opened on July 14. According to the request for proposal, the government has 95 percent stake in LIC.

Explained: The legal and legislative hurdles on the way

The government is expected to take about 8-9 months to prepare accounts and do the required legal work before an IPO could be launched because the listing will require amending the LIC Act. Amendments will have to be made to Sections 24, 28 and 37 of the Act. While Section 24 deals with the way the corporation handles its corpus, Section 28 pertains to dividend distribution norms and Section 37 focuses on government guarantee on all its policies. Currently, LIC pays 5 percent of the surplus to the government and the remaining 95 percent goes to its policyholders. This will have to relooked as LIC gets listed and the corporation will have to offer dividend to an external shareholder apart from the government.

Private insurance companies pay 10 percent of their surplus to shareholders, while the rest goes to policyholders. LIC’s equity capital, which currently stands at Rs 100 crore will also have to be increased in order to sell even a 10 percent stake. 

In order to deal with these issues, the RFP floated by DIPAM mandates the advisors to evaluate the capital structure of LIC and advise the government and LIC on optimal capital structure, including authorised capital, face value and bonus ratio, including any other alternatives to restructure the capital base and so on. 

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