Modi Government And DIPAM Got The LIC IPO Act Right; Here's What They Must Do Now

The Narendra Modi government and the Department of Public Investment and Management (DIPAM) must be complimented for the agility they have shown in ensuring the roaring success of the Life Insurance Corporation’s (LIC’s) 3.5 per cent initial public offering (IPO) which closed yesterday (9 May) with a three-fold subscription. That it happened at a time when the markets were moping and moaning makes this a good case study for how agility and adjustment to market realities are the keys to successful disinvestment management.

Making the LIC issue a success was never going to be easy, given its size and the public sector tag that dissuades most investors who only want to make a quick buck. Three decisions in particular paved the way for its success.

First, the size of the issue was reduced from 5 per cent to 3.5 per cent, thus tightening the available supply.

Second, the offer of a large quantity of discounted shares for employees and policyholders was a masterstroke. These parts of the issue got 4.4 and 6.1 times over-subscribed. The retail portion also got twice its earmarked quantity.

Third, by making the IPO retail-led, the government essentially showed the smarter big investors – qualified institutional buyers and non-institutional investors – that they may be missing out on some action, given the alacrity with which policyholders and employees were snapping up the issue. Investors watch what “insiders” are doing in a share, and in LIC’s case, these insiders are employees and policyholders.

This strategy has essentially ensured that most investors will be left with some instant gains when the shares get listed next week. Way to go. Disinvestment cannot only be about government raking in the moolah and no one else – as has been the case with most public sector listings so far.

The psychological impact of millions of policyholders, employees and retail investors investing in LIC cannot be underestimated. It shows the value of brand LIC, which is essentially the creation of employees and policyholders.

One of the key elements in Warren Buffett’s share investment strategy is a focus on brands which can deliver long-term returns and good cash flows. Though it is true that small investors, employees and policyholders got a sweet deal in LIC, when you are putting in your own money in a share, you are affirming confidence in the brand too.

Unlike retail and small investors, the smart institutional investors came in only at the last minute, showing that they were investing like traders while retail investors were behaving like Buffett, investing for core brand value. Sure, retail investors too may want to make a quick buck and exit, but this is where government must ring-fence LIC and ensure that it is not run arbitrarily by faceless bureaucrats.

Here is one suggestion on how to make LIC a truly high-performance, highly-valued public sector company. When the next tranche of 1.5 per cent is offered for sale, let LIC issue fresh shares to dilute the government stake, so that the money raised goes to build LIC’s own future than to fill government coffers. There is a lot of time to disinvestment all the way to 75 per cent, but there is very little opportunity to invest in India’s best-known and profitable public sector brand.

DIPAM should live up to its name, and become a true pilot of public investment rather than just disinvestment. The next 1.5 per cent must be raised by LIC for its own growth, and not the government for blowing up on subsidies or freebies.