News

Published: June 14, 2024
Updated: June 14, 2024

LIC Stake Sale Postponed to FY2026 Amid Market Assessment

Government Delays LIC Stake Sale

The Indian government has decided to postpone the next round of stake sales in Life Insurance Corporation (LIC) until FY2026. This decision follows a strategic pause in the privatization process to gauge investor appetite, according to two insiders.

Small-Scale Issues to Test Market Waters

Instead of large-scale divestments like LIC, the government plans to test the market with smaller issues from state-owned enterprises and financial institutions this year. This approach aims to better understand investor sentiment and market conditions before proceeding with another substantial sale of LIC shares.

Current Stake and Regulatory Extensions

The government currently holds a 96.5% stake in LIC, having sold 3.5% during the initial public offering (IPO) in May 2022. The Securities and Exchange Board of India (SEBI) initially set a deadline for LIC to achieve a minimum public shareholding of 10% by May 2024. However, this deadline has been extended to May 16, 2027, providing additional time to meet the regulatory requirement.

Strategic Timing for Future Sales

An insider explained that the next round of LIC stake sales will be strategically timed to ensure market readiness and optimal stock valuation. "LIC is too significant an issue for the government to sell hastily. The goal is to realize the true value of the stock, which has now stabilized," said the source.

Potential Sale in Tranches

The government plans to execute the stake sale in small tranches, starting with a potential 1.5% sale. This move could increase the public float to 5%, facilitating LIC's inclusion in index funds. The exact amount and timing will depend on market conditions at the time.

Market Conditions and Company Valuation

LIC's market capitalization at its May 2022 listing was approximately ₹5.5 trillion, making it India’s fifth most valuable company. However, the company's value has since declined due to various market challenges, including weak market conditions, changes in tax policy, and the Adani-Hindenburg controversy.

Expert Opinions

Madan Sabnavis, Chief Economist at the Bank of Baroda, emphasized the importance of careful planning for such a significant stake sale. "Rushing through the stake sale now may not be prudent. It’s better to plan, given the large amounts involved, and assess market appetite for such a significant issue."

An investment banker suggested that the current trading price of LIC shares might not reflect their true value. "The government might feel that the current price is low and not indicative of the stock's true value, which could explain the delay," the banker noted.

Market Performance and Absorption Capacity

LIC's IPO price in 2022 was ₹949 per share. As of the latest trading session, LIC stocks closed at ₹1001.80 per share, reflecting a slight increase. The Sensex also showed a positive trend, closing at 76,810.90.

Indian markets have demonstrated the capacity to absorb large block deals, as evidenced by Blackstone's recent sale of shares worth ₹6,736 crore in Mphasis.

The decision to delay the next round of LIC stake sales to FY2026 allows the government to better assess market conditions and investor appetite. This strategic pause aims to ensure that the stake sale is conducted at an optimal time, maximising value and market stability.