LIC IPO: 4 Reasons That Make LIC IPO A Game Changer In Indian Stock Market

India’s financial markets are about to witness a milestone: the listing of insurance giant Life Insurance Corporation (LIC) on stock exchanges.

Indeed, LIC’s long-awaited initial public offering (IPO) is just around the corner. The IPO may be delayed due to market volatility caused by the conflict between Russia and Ukraine. As the largest life insurance company in India and the fifth largest in the world, LIC’s listing on the stock exchanges will change many things in the Indian capital market.

For starters, investors’ portfolios will change when LIC shares begin trading on stock exchanges. That’s because savvy investors can’t afford to ignore the life insurance market leader with more than two-thirds of the market share. Even at a generic level, when designing portfolio structures, investors always show a preference for the market leader in an industry.

The second reason that contributes to the interest of investors in LIC is the lack of services in the life insurance market in our country. Despite LIC underwriting millions of insurance policies, India’s insurance premium to GDP ratio is 3.7%, well below the world average of 7.23%. This means that most Indians have inadequate life insurance compared to citizens of other countries.

The third meaning of the LIC price is the potential change in benchmark indices. LIC may be listed on the S&P BSE Sensex and Nifty50 very soon. This would mean that some other large cap company will be replaced by LIC. Once this happens, we may see some market turmoil as investors’ portfolios adjust to the nation’s largest insurer.

The fourth important aspect of the LIC listing has to do with the insurer’s disclosure of its portfolio. With assets worth Rs 39 trillion more than the entire mutual fund industry combined, LIC is the largest investor in government bonds and equity assets. Post-listing, like any other publicly traded company, LIC will have to make quarterly disclosures on its financials each quarter. This will allow all market players to review changes in the LIC portfolio and take important leads.

LIC’s IPO has already created a euphoria in the market, and not a day goes by without a press report on the IPO. The government’s offer for the sale of a 5 per cent stake or 316 million shares will make LIC the third most valuable company in India.

The draft red herring prospectus (DRHP) filed by LIC with the Securities and Exchange Board of India (SEBI) provides comprehensive insights into how Indian households are increasingly investing in financial assets. Between 2012 and 2020, household savings in financial assets increased from 31% to 41%.

Capital markets in India will get a much-needed boost from LIC’s initial public offering. It has already caused a spike in new demat account openings following the insurer’s campaign encouraging existing policyholders to open demat accounts. LIC policyholders may receive a discount on the price of the shares offered in the initial public offering. Depending on its valuation, the government is likely to divest 5-10% of its stake in LIC.

There is a special reserve of 10 percent of the issue size for policyholders. There is a possibility that this category (of policyholders) will obtain LIC shares at a discount to the price set in the bookmaking process for the initial public offering.

The Indian stock market needs the boost as barely 3% to 4% of Indians’ equity assets are owned. We believe this number should be much higher because, over time, stocks have been shown to outperform all other types of financial assets, including bonds, real estate, and gold. Hopefully more and more Indians take note of this reality and start investing in stocks as soon as possible.

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