[Ayush Shandilya]
The author is a student of National Law University, Odisha.
Introduction
The Initial Public Offering (“IPO”) of Life Insurance Corporation (“LIC”) was announced during the annual budget session of 2020 but it took the Government a little over two years to finally come up with the IPO. The delay in the IPO could be attributed to the pandemic situation that had disrupted the market along with the Russia-Ukraine war. After an unprecedented delay, the government entity Life Insurance Corporation of India or LIC filed its Red Herring Prospectus (“RHP”) with the Securities and Exchange Board of India (“SEBI”) for its IPO. The IPO was launched for trading in the grey market on May 4, 2022. The issue size of the IPO is around Rs 21,000 crore making it the biggest public issue in the Indian history. The previous biggest IPO was that of Paytm with an issue size of 18,300 crores followed by Coal India, Reliance Power, and General Insurance Corporation with an issue size of 15,475 crores, 11,563 crore,s and 11,372 crores respectively. The aim of this article is to put light on the rare support shown by the SEBI for LIC IPO. The article would begin by explaining all the relaxations that SEBI has offered to LIC in order to help the corporation to come up with the IPO followed by the LIC’s performance in the grey market and the reasons for such a performance. Lastly, the article would conclude with the author’s personal remarks on the entire scenario.
Relaxations Provided By SEBI
The issue size of the IPO has definitely drawn the interest of the investors but at the same time, there are various legal issues in the picture as well. To start with, there is a provision in the Draft Red Herring Prospectus (“DRHP”) that allows the LIC to reserve 10% of the issued shares for the policyholders. Another provision in the RHP allows the policyholders and the employees to apply for shares at a discount to the offer price. The discount given to the policyholders is Rs 60 per share and that to the employees is Rs 45 per share. As LIC has the largest customer base amounting to 282 million, this provision would attract a lot of them to invest in the IPO. The relaxations by the way of amendments and exemptions by SEBI have been discussed below.
Amendment in the LIC Act 1956
All kinds of public offerings including the initial public offerings are governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations (ICDR) 2018 which contains provisions in regulation number 30 under Part VII of the regulation that allows any company to issue shared at discount to its employees. It is thereby not a unique practice to offer shares at discounted rates to the employees but it is for the first time that a company is giving discounts on the shares to its customers i.e. the policyholders. There is no provision in the ICDR to do so. Section 5(9) of the Life Insurance Corporation Act,1956that went through an amendment in September 2021 provides the following and the same has been mentioned on page number 253 of the RHP. The amended section said that regarding various categories of person in favor of whom the corporation might make reservations in relation to the IPO, it may also make a reservation upto 10% at any time during the 5-year period from the date of commencement of section 131 of the Finance Act 2021. It also allowed the corporation to offer a discount up to 10% on the above-mentioned reserved class
The above mentioned amendment was bought into action just a few months before the filing of the RHP which clearly suggests that the purpose of this amendment was to make sure that the investors gets attracted to the IPO.
Amendment in the SCRR 1957
Another amendment that was bought ahead of the LIC IPO was made in the Securities Contract (Regulations) Rules, 1957 (“SCRR”) in 2021. Rule 19(2) mandated the companies to offer at least 10% of their post issue capital and within a span of three years, dilute the shares to 25% from the above mentioned 10%. After the amendment in 2021, a new sub-rule (sub-rule iv) came into existence under the same rule and it now allows companies that have a post issue capital of more than one lakh crore to dilute at least 5% of their shares to the public while listing. This shareholding should be increased to 10% within two years of getting listed and upto 25% within 5 years of getting listed. This amendment allowed the LIC (whose post issue capital is more than one lakh crore) to dilute only 5% of the share and not 10% as it was earlier. Additonaly, this amendment would encourage the large companies to come up with the IPO even during unstable market conditions as now the companies need not dilute a large amount of their capital to be able to offer shares to public. For LIC, the current market conditions are not favourable owing to rising oil prices and Russia-Ukraine war and hence diluting 10% of the capital might not be a good option. Therefore this amendment would help LIC in coming out with the IPO as now it has to only dilute 5% of its capital.
Exemption from the Lock-In Period
SEBI in its board meeting on December 28, 2021 had announced that it would continue the existing 30 day lock in period norm for the anchor investors. The norm stated that there shall be a 30 day lock in period for 50% of the allotted shares. A new addition was done to this norm which stated that for the rest 50% of the shares, the lock in period would be of 90 days. This norm was to come into force from April 1, 2022 but later the enforcement date was changed to July 1, 2022. This change in date of enforcement of lock in period was done to provide security to anchor investors and to encourage them to buy the shares of LIC. This change in the date of enforcement of the lock-in period was done to provide security to anchor investors and to encourage them to buy the shares of LIC. Now the anchor investors need not hold the shares for 90 days after the purchase and they have the option to sell it whenever they feel fit.
Exemption from Filling Fresh DRHP
The Draft Red Herring Prospectus was filed on February 13, 2022 by the LIC. It mentioned an offer size of 316,249,885 shares which is approximately 5% of the post issued capital of the corporation. This offer size was reduced to 221,374,920 shares which form 3.5% of the corporation’s post issue capital. This reduction was done owning to the damage that the Russia-Ukraine war had done to the market and other factors that has led to market being more volatile than ever. Under Schedule XVI, any such changes would require a filing of fresh DRHP but understanding the present market conditions and the interest of the government in this IPO, SEBI granted exemption to the LIC in this regard. It is also important here to know that in the consent letter issued on government’s behalf, there is a mention to increase the public shareholding from 3.5% to 5%.
LIC in the Grey Market
The LIC subscription opened for trading in the Grey Market from May 4, 2022. A grey market is a place where the shares of a company are unofficially traded before it listed on the stock exchange. Only the Qualified Institutional Buyers or the big investors are allowed to trade in the grey market. The performance of the shares in grey market is very important as it is an indicator of how the stock would perform after it gets listed. In other words, the performance of an IPO in the grey market determines its performance after the listing. LIC did not perform well in the grey market. The LIC IPO did not perform well at all. The reason for such a bad performance in the grey market could be many. One of the main reasons is that the Qualified Institutional Buyers (“QIBs”) have not shown much interest in the IPO of LIC in the grey market. The subscription rate of the QIBs is only 50% which shows a lack of interest from their end. The reasons for such lack of interest could be many. The market share of LIC has been falling down since 2000 when the government allowed private players to come in the securities business. Market share of LIC in 2000 was 100% but after the coming in of the private players, it fell down to 64.1% and is still showing a downward trend in this regard. Other reasons for the fall in the market share could be that it is a government-owned entity and thereby is not a profit-orientated company. In today’s world when everything is getting digitalized, more than 90% of LIC still works in a non-digital manner which makes it a hassle for the public. Apart from this, the premium rates of LIC are very high as compared to other entities because most of the money is distributed to the agents of the LIC which makes the premium costs.
Conclusion
Market regulators like the SEBI have a great role to play in protecting the interests of promoters of the company as well as the investors. A balance between the two would ensure the smooth functioning of the market. Many companies in today’s time are coming out with their IPOs and subjecting all companies to one rule would be unfair for many. As explained in this blog post, the SEBI has shown flexibility for LIC’s IPO and thereby proved that the needs of the capital market can be fulfilled by twitching some rules and showing flexibility in implementing the same. In today’s time, when investors are selling more and buying less because of volatile market conditions, the support shown by SEBI for the LIC IPO has proved to be a positive sign for the investors, be it a common man or a high net worth individual. This increase the expectations from SEBI and only time would tell whether SEBI would fulfil those expectations or not.