Government may have to infuse capital into LIC before IPO

MUMBAI: Besides amending the Life Insurance Corporation (LIC) Act, the government will need to infuse capital into the PSU giant ahead of its initial public offering (IPO). This is because the corporation’s paid-up capital is only Rs 100 crore, which is not enough for a public flotation.

The most conservative estimate values LIC at around Rs 10 lakh crore. If the valuation is close to that of another public sector life insurer SBI Life, it would be around Rs 18 lakh crore. Even if the shares were split to be worth Re 1 each, it would be valued at Rs 10,000 in the market. To create the required liquidity in the corporation’s stock, the government will have to expand the capital base to around Rs 10,000 crore, insurers say.

The Union Budget has, however, not made any provision for capitalising LIC. Although it has made a provision of Rs 6,950-crore capital infusion for three public sector non-life insurance companies — National Insurance, Oriental Insurance and United India Insurance.

For regular companies, there is always an option to capitalise reserves. But, in the case of LIC, its surplus is distributed to policyholders and the government in the ratio of 95:5. LIC does have large reserves to meet solvency margin requirements. However, actuaries say that Irdai regulations do not permit the use of reserves meant to maintain solvency margin towards capitalisation.

“One option would be for the government to forego the dividends being paid out by LIC and let the corporation plough it back as capital. But even under this route, it will take years for the corporation to achieve the desired level of capitalisation,” said an industry source.

Last week, LIC chairman M R Kumar had said that the LIC Act would need to be amended before an IPO. The changes to the act would include increasing paid-up capital of the corporation and removal of the requirement that the government owns 100% stake. The corporation, on its part, would have to undertake a valuation exercise including finding its embedded value, which reflects the future profits likely to be earned from policies that have been issued.

According to Macquarie Capital Securities research analyst Suresh Ganapathy, the government has budgeted close to Rs 1 lakh crore of proceeds from an LIC IPO. “It is impossible to value now because LIC doesn’t disclose embedded value, return on embedded value, new business margin, plus all those gains sitting on its books… How much of it is in shareholder’s account? So, it’s a big black box now.”

According to Ganapathy, a basic way of looking at the valuation would be as a percentage of assets under management (AUM). “The cheapest today is ICICI Prudential Life at 40% of AUM. Being a public sector undertaking, you put a discount for LIC and see. Say, if you put 35%, then its Rs 10.8 lakh crore,” he said. Even at this valuation, LIC is the country’s most valued company and a sub 10% stake sale (as talked about by the government) can fetch that much divestment amount as budgeted.

Source: The Times of India