The government plans to bring in more than two dozen anchor investors to invest up to ₹25,000 crores in the shares of LIC in its planned mega initial public offering (IPO), said two people, including a top central government official. We will invite anchor investors after the embedded valuation exercise is done and the pricing for the IPO is ready, the government official said.
“Anchor investors will buy LIC’s shares to help measure market demand. They will buy a portion of the shares meant for qualified institutional buyers (QIBs). If anchor investors pay a certain amount and the market is ready to pay more than that on the day of IPO, the anchor investors will have to bring in the extra amount to match the market price. If the market shows a demand of less, we don’t have to refund the extra amount to anchor investors. This is the benefit of having anchor investors,” the official said.
Anchor investors are QIBs who agree to buy the company’s shares at a particular price by applying to invest at least ₹10 crores in the IPO before it opens, according to the listing norms in SEBI. As much as 50% of the shares of an IPO can be offered to QIBs. Of this, up to 60% can be allocated to anchor investors. One-third of this is reserved for mutual funds.
Allocation to anchor investors is done on a discretionary basis for IPOs above ₹250 crores. There is no cap on the number of anchor investors and an additional 10 such investors are allowed for every additional ₹250 crores worth of issue size, in which ₹5 crore is the minimum allotment required for each such investor. There is a lock-in of 30 days on shares for every anchor investor, according to SEBI.
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LIC’s IPO is a crucial divestment for the government to get non-tax revenue, narrow the country’s fiscal deficit and compensate for budgetary expenses outlined by the exchequer.
The insurer’s board will have a new structure to make it eligible for listing, the two persons said. At present, LIC’s board comprises its chairman, four managing directors, representatives of the insurer, and the government. Also, LIC needs to change its financial reporting structure by consolidating the financials of its various businesses. LIC has a mutual fund company, a pension fund company, and overseas businesses. When an entity goes for an IPO, disclosing consolidated annual results is mandatory. So, LIC needs to consolidate its financials, the government official said.
LIC’s IPO is taking longer than usual because the insurer has not been doing its embedded value calculation on a regular basis. In contrast, private insurers such as Bajaj Allianz, ICICI Prudential, and HDFC Life have been regularly doing this embedded valuation exercise even before their listing.
Both the government and Sebi have been attempting to make rules favorable for LIC’s IPO. On 1 February, in the finance bill presented by Union finance minister Nirmala Sitharaman, the government said the Centre will hold at least 75% in LIC for the first five years post the IPO and subsequently hold at least 51% in the insurer at all times after five years of the proposed IPO.
LIC, in which the government holds a 95% stake, is the largest insurer in the country with assets worth more than ₹34 trillion. The insurer recorded new business premium of ₹1.84 trillion for fiscal 2021, which is almost double the total premium collected by all private insurers together (in the same period). LIC commands a market share of 67% in the life insurance space.
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