LIC IPO 10% reserved for policyholders: rules explained

Published: February 9, 2021 at 6:36 pm

Finance Bill 2021 has proposed several amendments to the Lic Insurance Corporation Act 1956. Most notable among these is the 10% reservation of the LIC IPO issue size to policyholders. Here is an explanation of the associated rules.

What exactly does the finance bill say? Extract from Page 108 of the bill

regarding various categories of persons in favour of
whom an issuer may make reservations on a competitive
basis, in relation to a public issue, the Corporation may make
a reservation on a competitive basis, to an extent of up to ten
per cent. out of the issue size, in favour of its life insurance
policyholders as one of the reserved categories for such
public issue.

Provided that the value of the allotment of equity shares
to such a policyholder shall not exceed two lakh rupees, or
such higher amount as the Central Government may by
notification specify

Investors are looking at the 10% stake (which in of itself is quite small considering LIC’s customer base) but should be focusing on the words “competitive
basis”. This typically means to stand any chance of allotment the amount to be invested has to be at least two lakhs or any other higher amount when the issues come out.

This is because LIC has several customers in the upper-middle-class or HNI (high net worth category) who can easily afford the two lakh or even high limit.

The bill also states:

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    Provided further that, in the event of under-subscription
    in the policyholder reservation portion, the unsubscribed
    portion may be allotted on a proportionate basis, in excess of
    the value referred to in the first proviso, subject to the total
    allotment to a policyholder not exceeding five lakh rupees or
    such higher amount as the Central Government may by
    notification specify:

    Provided also that the policyholders in favour of whom
    reservation is made under this sub-section may be offered
    shares at a price not lower than by more than ten per cent. of
    the price at which net offer to public is made to other
    categories of applicants;

    This “in the event of under-subscription in the policyholder reservation portion” is unlikely and therefore need not be considered any further! The next section means LIC’s life insurance policyholders may be offered shares at a price lower than that
    offered to the public (max 10% discount).

    With competition among policyholders for this 10% stake likely to be intense, it makes no sense for interested investors to buy a LIC cover just to be eligible for this discount.  Even if they bid the maximum amount possible, allotment is a long shot.

    Chances of getting LIC IPO allotment would be higher if the investor (whether LIC policyholder or not) compete in the general category and place a large bid. The policyholder discount will not apply, but that would be the price of higher allotment probability. A listing gain (assuming there is no market turmoil when trading beings) would take care of this ‘loss’. Please note that this is not a recommendation to bid

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