MUMBAI: The Centre on Friday set the ball rolling for partial divestment of its stake in India’s largest insurer and institutional investor – Life Insurance Corporation of India (LIC).

The Department of Investment and Public Asset Management (Dipam) under the finance ministry has issued a request for proposal (RFP), seeking to engage pre-transaction advisors for partial disinvestment of the government’s equity shareholding in LIC through an IPO, the scope of which could include advising government on the necessary amendments needed to the LIC Act.

It proposes to engage up to two pre-IPO transaction advisors from “reputed professional consulting firms/ investment bankers/ merchant bankers/ financial institutions/ banks, independently (not in consortium) for facilitating or assisting Dipam in the preparatory processes leading to the IPO of LIC India.”

The government has 95% stake in LIC, according to the RFP.

The last date for bid submission is 13 July, and the bids will be opened 14 July.

Currently, there are 24 life insurers in India, with state-run LIC being the largest, commanding a market share of 69% in fiscal 2020. LIC collected a total first year premium of Rs. 1.78 trillion in FY20, up 25.2% year-on-year, according to the Insurance Regulatory and Development Authority.

The Dipam circular said to qualify as an advisor for the pre-IPO deal, the bidder should have an experience of handling at least one IPO of a minimum size of 5,000 crore between 1 April, 2017, and 31 March, 2020, or should have managed a capital market transaction of 15,000 crore or more during this period.

The fee quoted by the potential advisor for the deal should be a minimum of Rs1.

While presenting the Union Budget for 2020-21, finance minister Nirmala Sitharaman had said, “Listing of companies on stock exchanges disciplines the company and provides access to financial markets and unlocks its value. It also gives an opportunity for retail investors to participate in the wealth so created. The Government now proposes to sell a part of its holding in LIC by way of Initial Public Offer (IPO).”

Listing of LIC may not be an easy process as it would require amending the LIC Act.

On 7 February, Mint reported that amendments to the Life Insurance Corporation Act, 1956, including changing the way LIC distributes its surpluses, will be key to the proposed public offer.

The proposed IPO of LIC will be preceded by amendments to Sections 24, 28 and 37 of the Act. Section 24 deals with the way the corporation handles its corpus, Section 28 is about dividend distribution norms and Section 37 provides government guarantee on all its policies.

At present LIC pays 5% of the surplus to the government, while the remaining 95% goes to its policyholders. This needs to be relooked when LIC gets listed and there is an external shareholder who should be entitled to get dividends apart from the government.

Private insurers pay 10% of their surplus to shareholders and the rest goes to policyholders.

In 2018-19, LIC generated a surplus of Rs.53,214.41 crore and paid Rs.2,611 crore as dividend to the government.

According to existing rules under Section 37 of the Act, “sums assured by all policies issued by the corporation including any bonuses declared in respect thereof…shall be guaranteed as to payment in cash by the central government.

LIC will have decide on the retention of government’s guarantee of the divested entity upon listing.

Section 24 of the Act also needs to be amended. The section explains how “the corporation shall have its own fund and all receipts of the corporation shall be credited thereto and all payments of the corporation shall be made therefrom”.

LIC’s equity capital stands at 100 crore, which needs to be increased in order to sell even a 10% stake.

To deal with these issues, Dipam, on Friday, said the advisors will be required to evaluate the capital structure of LIC and advise the government and LIC on optimal capital structure including authorised capital, face value and bonus ratio including any other alternatives to restructure the capital base and so on.

They will also have to help LIC prepare restated consolidated financial statements for the past three years for the LIC Group including its subsidiaries, branches and overseas operations, said the government.

Advisors will also need to assist the government on modalities of IPO and the timing of the minority stake sale in LIC, apart from recommending the need for any other intermediaries for the process.

It will be the advisors’ job to support LIC in its preparation for the IPO and matters relating to compliance with Sebi and Irdai’s listing regulations including IPO application to Irdai.

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