LIC IPO: Let Retail Investors Hold the First Right to Ownership

As we ring in the new year, the buzz around disinvestment of the insurance behemoth, Life Insurance Corporation (LIC), is getting louder. All eyes are peeled for the timelines of the LIC Initial Public Offering (IPO), which is expected by the fourth quarter of the ongoing financial year 2021-22.

Reports suggest that the government may dilute 5% stake of LIC and raise about Rs. 75,000 crores, thereby giving a valuation of 15 lakh crore.

Retail investors’ unfulfilled expectations

Colossal demand is expected not only from institutional but retail investors as well. The retail demand for recent IPOs has been going through the roof. For instance, in this calendar year, the retail quota of the Rs 600 crore Latent View Analytics IPO was oversubscribed by a whopping 120 times, while Paras Defence And Space Technologies' retail quota was oversubscribed 113 times!

Unfortunately, the extent of retail oversubscription results in many investors from this category failing to get even a single allotment. 

While there is no financial loss to retail investors who do not receive allotment, beyond their funds being blocked for a few days at the most, it can be very discouraging, especially for novice equity investors.

The LIC IPO should set a different example in terms of the IPO allotment. Why can’t all retail investors get an allotment in the LIC IPO? Not only will it widen the stock market base, but it will also give Indian individuals a chance to directly own a stake in a strong Indian brand.

Positive equity investing experience

Another concern is that while retail investors queue up to subscribe for big-ticket IPOs, they tend to feel let down when the post-listing experience does not live up to expectations.

Remember the days when the much-sought-after Reliance Power mega-IPO hit the market in 2008? Brokers’ offices were open all day and night to facilitate investor subscriptions. However, the bitter after-taste of that experience has left many investors wary. On the day of listing, it closed 17% below the issue price and even a decade after listing, the stock could never cross its issue price.

A similar frenzy is expected around the LIC IPO. However, a striking difference is that LIC is a robust investment opportunity. It is the only Indian PSU that has held on to its huge market share, even after privatization in the sector and the entry of numerous players. It remains the strongest insurer even after 20 years of private players being in the space. From telecom to banking, the foray of private players has unsettled their PSU peers. In contrast, private insurers are yet to disconcert the giant LIC, which is the third strongest and the 10th most valuable insurance brand globally. If first-time investors are encouraged to own a Navratna like LIC, they are more likely to experience the joy of owning a genuine wealth-creator and take interest in their equity investment journey.

Change the rules of the game

While a huge number of retail investors have begun investing in stocks over the last couple of years, there is still scope for wider participation. The Central Depository Services (India) Limited (CDSL) has over 5.26 crore demat accounts while National Securities Depository Limited (NSDL) has around 2.45 crore accounts, as on 30 Nov 2021. The strength of the LIC brand could attract many more first-time investors to the equity investing community through its IPO. But imagine a scenario wherein they open a Demat account, towards subscribing to the IPO, and fail to get allotment due to oversubscription. It could end their equity investment journey before it even starts.

Existing IPO rules need a revision in favour of retail investors. The LIC IPO gives the government one of the biggest opportunities to deepen the capital market at the retail level. It could mandate that all retail investors must get IPO allocation before institutional buyers.

As things stand, institutional buyers get allotment in the pre-IPO stage. Then come the qualified institutional buyers (QIBs), who get allotment on a proportional basis. In the case of retail investors, the rule requires that every single retail investor must apply for at least one lot, for the application to be considered. One lot size entails a commitment of between Rs 10,000 to Rs 15,000. If there is oversubscription, not all retail investors will get allotment. The allotment is then executed on a lottery basis. This luck-based allotment is beginning to discourage retail investors from participating in IPOs.

Needless to say, retail oversubscription is highly likely in the LIC IPO. Consider this – if all 7.7 crore investors were to apply for the IPO, at even the base case of Rs 10,000 per investor, it would subsume the entire IPO size that is expected at Rs 75,000 crore.

When it comes to Institutional investors, these entities can still participate in the opportunity by buying LIC shares from the secondary market, once it lists. In fact, this will enhance the potential upside for retail investors further.

Rewriting History

If the government can assure all retail investors that they will get priority in allotment over everyone else, when they subscribe to the LIC IPO, it will encourage many more investors to apply for it.

This is in line with the spirit of financial inclusion that Prime Minister Narendra Modi envisions. The government offering its best Navratna to the public and giving them priority over big investors will make a strong statement. Indian individual investors should hold the first right to own LIC, a strong PSU firm, which itself owns substantial stakes in other PSUs and bluechips.

The government has already set a precedent with the LIC IPO, by defining a ‘policyholder category’ in the LIC IPO. In a similar spirit, it could do something for retail investors and give the entire equity investing culture in the country a shot in the arm too. What better way to sow the seed of equity investment among the retail community than with a company like LIC!