Chances of an initial public offering of Life Insurance Corp of India in 2020-21 (Apr-Mar) seem low, brokerage firm Macquarie Capital Securities India in a note today.
"We spoke to some valuers and actuaries in the industry who usually do the IPO valuation metrics for life insurance companies...They believe the chances of an IPO materialising in FY21 look low," the brokerage firm said.
The actuaries and valuers Macquarie spoke to believe there are several legal and operational challenges with respect to the initial public offering.
In her Union Budget 2020-21 speech, Finance Minister Nirmala Sitharaman announced that the government would list the shares of the country's largest life insurers on stock exchanges.
Later, Finance Secretary Rajiv Kumar said the government was likely to bring out the initial public offering in the second half of the next financial year. The government is banking on proceeds from the offering to help meet the 2.1-trln-rupee divestment target for 2020-21.
Apart from the legal challenges of amending the LIC Act and converting LIC to a company under the companies Act, the biggest problem is that in the case of LIC, the entire surplus is in the form of 95:5, the brokerage firm said.
Under the 95:5 system, 95% of LIC's surplus belong to policyholders, while only 5% belongs to shareholders.
This is unlike the private sector, where only participatory policies have a 90:10 distribution ratio and the rest is attributable to shareholders, the brokerage firm said.
So, if the government wants to list LIC, it has to create three separate funds--a traditional participatory book, a non-participatory book, and a shareholders' fund.
On the potential valuation of the life insurer, the brokerage said theoretically, the enterprise value today could only be the present value of 5% of the surplus attributable to shareholders, and that number was very low at 200-250 bln rupees.