From UPSC perspective, the following things are important :
Prelims level : IPO
Mains level : LIC disinviestment
The government has started the process to launch the initial public offer (IPO) of Life Insurance Corporation (LIC) within this year.
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Try this question from CSP 2019:
Q.In India, which of the following review the independent regulators in sectors like telecommunications, insurance, electricity, etc.?
- Ad Hoc Committees set up by the Parliament
- Parliamentary Department Related Standing Committees
- Finance Commission
- Financial Sector Legislative Reforms Commission
- NITI Aayog
Select the correct answer using the code given below:
(a) 1 and 2
(b) 1, 3 and 4
(c) 3, 4 and 5
(d) 2 and 5
- LIC is an state-owned insurance group and investment corporation owned by the Government of India.
- It was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India.
- Over 245 insurance companies and provident societies were merged to create the state-owned LIC.
Why LIC IPO?
- LIC is the largest investor in government securities and stock markets every year.
- On an average, LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
- LIC also has huge investments in debentures and bonds besides providing funding for many infrastructure projects according to its Annual Report for 2017-18.
Biggest IPO in Indian markets
- The finance ministry has invited bids from transaction advisors, including consulting firms, investment bankers, and financial institutions, for assisting the government in the preparatory processes leading to the IPO.
- The IPO is expected to be the biggest in the Indian capital markets given the size and scale of LIC, the country’s oldest and largest life insurer.
What is the size and position of LIC in the insurance market?
- Even if the government decides to sell 5-10 per cent of its equity in LIC through an IPO, the share sale of LIC, which was set up in 1956, is expected to be the largest.
- The insurer’s total assets had touched an all-time high of Rs 31.11 lakh crore in 2018-19, an increase of 9.4 per cent.
- The Corporation realized a profit of Rs 23,621 crore from its equity investment during 2018-19, down 7.89 per cent from Rs 25,646 crore in the previous year.
- LIC would have at least one transaction of IPO of a size of at least Rs 5,000 crore, or a capital market transaction of at least Rs 15,000 crore.
How does LIC fit into the overall disinvestment roadmap?
- In the Budget 2020-21, the finance ministry had announced plans for IPO of LIC and a proposal to sell the government’s equity in the stressed IDBI Bank.
- The government expects to raise Rs 90,000 crore through stake sale in LIC and IDBI Bank, and another Rs 1.2 lakh crore through other disinvestments.
- LIC is also a majority shareholder in IDBI Bank.
- The government had earlier listed the shares of General Insurance Corporation and New India Assurance through IPOs three years ago.
What benefits can be expected through the IPO?
- An IPO will certainly bring in transparency into affairs of LIC since it will be required to inform financial numbers and other market-related developments on time to the stock exchanges.
- Investors can benefit from picking up equity in the insurer, which has been making underwriting profit as well as profits on its investments.
- LIC’s investment in various equity and bond instruments will come under greater scrutiny after its lists on the exchanges.
- IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.
- Offering an IPO is a money-making exercise. Every company needs money, it may be to expand, to improve their business, to better the infrastructure, to repay loans, etc.
- A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares.
- Through the IPO, the company gets its name listed on the stock exchange.