‘LIC IPO in current form will lead to loss of Rs 50,000 crore to GOI’

Hyderabad: LIC IPO in its current form will lead to a loss of more than Rs 50,000 crore as the current share price band severely undervalues the insurance behemoth, said People’s Commission on Public Sector and Public Services (PCPSPS). In a statement, it termed the LIC IPO as nothing short of a scandal and perhaps the biggest in the annals of privatisation in India. LIC IPO opens on May 4.

PCPSPS has Kerala Former Finance Minister Dr Thomas Isaac, Ministry of Power and Economic Affairs Former Secretary EAS Sarma, Planning Commission Former Member SP Shukla and others members of the Committee. The initial public offer (IPO) of the Life Insurance Corporation of India (LIC) will be the biggest in the history of Indian capital markets. The Committee alleged that the union Finance Ministry succumbed to the pressure by global investors and is offering the LIC shares at a deep discount.

According to the Draft Red Herring Prospectus filed with the Securities and Exchange Board of India (SEBI) in February, the Embedded Value (EV) of the LIC was estimated at Rs 5.4 lakh crore. It had 632.5 crore shares and each was worth Rs 853. Though EV is of limited value in estimating the true worth of a life insurance company, it was expected that a multiplication factor ranging from 2.5 to 4 would be used in pricing the LIC.

However, the Red Herring Prospectus (RHP) filed by LIC on April 26 priced the issue at Rs 904-949 per share. This implies a multiplication factor of just 1.11 at the upper end of the price range. At Rs 949 per share, the total earnings from the offer of 22.1 crore shares for the Government would be Rs 21,008 crore. Had a multiplication factor of 2.5 been used, the issue price in the IPO would have been Rs 2,132 per share. At this price, total earnings would have been Rs 47,197 crores. Since the multiplication factor is just 1.1, the Government is losing Rs 26,189 crore for the 3.5 per cent stake that is being offered in the IPO.

Since LIC is the biggest, a multiplication factor of higher than 2.5 would have also been justified. Applying a multiplication factor of 3.96 (of HDFC Life) to the LIC, would have taken the LIC’s base price to Rs 3,379. At this price, the total earnings from the sale of 22.1 crore shares would have been Rs 74,803 crore. Compared to this price, the loss to the public exchequer at the current price is Rs 53,795 crore.

The Committee said the Government should have waited for an opportune moment after markets had calmed. “How is it possible for the valuation of India’s biggest insurance company to vary so much within a matter of a couple of months?”

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