The LIC IPO might still be possible

Outside the Eco-Chamber

TThe initial public offering of the Life Insurance Company (LIC) of India, the country’s biggest life insurance company, was scheduled to happen in March. Finance Minister Nirmala Sitharaman had first announced the government’s plan to sell a part of its stake in LIC through an IPO in the Budget speech of February 2020.

It took the government two years to put everything in place, legally or otherwise, to be able to sell a part of its stake in the life-insurer. And just as it was about to do that, Russian President Vladmir Putin decided to attack Ukraine. The LIC IPO is caught in the aftermath of Putin’s decision. Talk about bad timing.

With a size of Rs 70,000 crore or perhaps even more, the IPO was expected to be India’s biggest till date. Given this, the government seems to be in the mood to postpone the IPO to a later date. But should it?

As of February 23, a day before Putin attacked Ukraine, the BSE Sensex, India’s most popular stock market index, was at 57,232 points. The next day, after the early morning attack, the Sensex fell, and closed the day at 54,530 points, or around 5% lower.

This set the cat among the pigeons and doubts about LIC’s IPO started to be raised. Nonetheless, the Sensex has gone up since then and on Friday, it closed at 55,550 points, or around 2% higher than where it was on February 24 and 3% lower than where it was on February 23.

In that sense, nothing much has changed in the stock market. While the foreign institutional investors have been relentlessly selling Indians stocks, the domestic institutional investors have been buying.

Data from the Securities and Exchange Board of India shows that from February 24 to March 10, foreign investors have sold stocks worth more than Rs 55,000 crore. During the same period, domestic institutional investors have bought stocks worth around Rs 45,000 crore. Domestic institutional investors consist of mutual funds, insurance companies, provident funds, pension funds, banks, etc. These investors primarily invest money collected from retail investors.

Interestingly, LIC is itself a big buyer of stocks. In its draft red herring prospectus filed before the IPO, the company mentions that as of September 30, it had around Rs 9.8 lakh crore invested in stocks. As of the same date, Rs 12.8 lakh crore was invested in equity mutual funds. All the money invested in equity mutual funds is not invested in stocks. Some if it is invested in debt securities and some in cash. Nonetheless, a bulk of it is invested in stocks.

Other than LIC, there are many private insurance companies as well. These companies also invest in stocks. Hence, it safe to say that insurance companies invest as much money in stocks as mutual funds do, if not more. Of course, insurance companies and mutual funds have no money of their own. They only invest money that retail investors pay as a premium or invest in equity schemes. This means that insurance companies and mutual funds are by far the biggest investors of retail money in stocks, albeit indirectly.

Of course, there has been an explosion in the number of people opening demat accounts as well. As of January 2022, the total number of demat accounts stood at 8.4 crore, with more than 40% of these accounts having been opened after December 2020. A lot of retail money is coming into stocks, directly as well as indirectly.

This is reflected in the close to Rs 45,000-crore invested in stocks by domestic institutional investors from February 24 onwards. In that sense, the DIIs are buying as FIIs are selling, which means that retail investors are essentially providing the foreign investors an easy exit route. Given this, the retail demand for stocks is still strong.

In this environment, the government can bring in the LIC IPO. Of course, there are a few things that it needs to keep in mind. The shares need to be reasonably priced, unlike what happened with a whole host of start-up companies which barely made any money and listed on the exchanges in 2021. This will leave some profit on the table for retail investors. Further, the government need not go with an issue size of Rs 70,000 crore or more. They can aim for an issue of lower size. Even at Rs 35,000 crore, the IPO will be the biggest that the Indian market has ever seen.