Industry News

Insurance behemoth Life Insurance Corporation of India (LIC) is likely to come out with its initial public offering (IPO) in March. It’s draft red herring prospectus (DRHP) does not specify the offered size, but the central government will offload 31.6 crore shares or 5 percent of its stake in the company.

Besides the humungous issue size – estimated to be anywhere between Rs 50,000 crore to Rs 90,000 crore – the IPO is also being talked about for the unique quota it has created.

In a first-of-its-kind move, LIC has decided to carve out a policyholders’ quota in its public issue. While the exact portion is yet to be finalized, it can go up to 10 percent. “The aggregate of reservations for the eligible policyholder(s) shall not exceed 10% of the offered size,” its draft prospectus stated.

However, as a policyholder, you need to fulfil a few conditions to be eligible for the reservation. Here is all that you need to know before investing in the IPO.

What is the proportion of shares that will be reserved for policyholders in its public issue?

LIC has not specified the exact portion to be reserved for policyholders. However, the threshold is 10 percent. “The aggregate of reservations for eligible policyholder(s) shall not exceed 10 percent of the offer size,” the DRHP stated. As a policyholder, you can invest a maximum of Rs 2 lakh under the quota.

How can I find out if I am eligible for the policyholders’ quota?

Individuals with even one LIC policy as on February 13 (the date on which the DRHP was filed) and the bid or offer opening date can apply under the policyholder reservation portion. That is, you if you have purchased a policy after February 13, you will not qualify. If you are an annuitant – that is, if you are deferred or immediate pension policyholder receiving regular pension – you, too, will be allowed to apply. But if your deceased spouse was an annuitant and you have been receiving the annuity after her death, you will not be eligible for this reservation. Those covered under group policies will not be eligible to apply under this quota.

There is a lot of talk around the discount that policyholders who wish to participate in the IPO will get. What is the quantum?

Yes, LIC policyholders are likely to get a discount on the issue price. However, LIC has not specified the quantum of discount so far. If finalised, it will be revealed at least two working days prior to the bid opening date. “Any discount between 5-10 percent would be a good discount,” says Shyam Sekhar, Founder, iThought Financial Consulting LLP, a wealth management firm.

LIC is running campaigns on PAN updation, but I have not completed the process yet. Do I still have time?

Updating PAN in LIC’s records is mandatory. Make sure that you complete the process of updating your PAN on LIC’s portal by February 28. If you fail to do so, you will not be considered an ‘eligible’ policyholder, LIC has made this clear.

I do not have a demat account. Can I use my parent’s or spouse’s demat account to apply?

Having a demat account is mandatory to participate in IPOs. And, as a policyholder who wishes to apply for LIC’s IPO, you should be the first account holder in your demat account. If it is joint account, then you should be the first or primary holder.

Is there any minimum sum assured or premium requirement to be eligible to bid under the quota or later for allotment?

LIC has not laid down any such condition to qualify for the quota. Similarly, allotment is not linked to the number of policies, premium amount or sums assured.

My mother has designated me as a nominee in her policy. Can I apply under the quota?

No. The quota is for policyholders not beneficiaries, so you will not be eligible. Likewise, beneficiaries who have received the death claim amount after the policyholder’s death cannot bid under the policyholder reserved portion.

I have been a long-time LIC policyholder, but now I live abroad. Can I apply under the quota?

Only resident Indians are allowed to bid under the quota.

My husband and I have a joint life policy. Can both of us bid under the policyholder reservation portion?

No. Only one of the two will be eligible to bid under the quota. PAN of the person who would be applying should be updated on LIC portal.

I am an LIC employee and also hold its policies. Can I apply under employee, policyholder as well as retail portions?

Yes, you can. “Application made in the policyholder reservation portion, employee reservation portion and retail portion – here all 3 bids would be considered as valid applications and will not be rejected as multiple bids,” the DRHP says.

Likewise, if you make applications under employee, policyholder and non-institutional portion, all three bids will be considered valid. However, let’s consider a scenario where you make applications under employee and policyholder quota as well as retail portion along with non-institutional category. Here, applications made in retail and non-institutional portions will be considered multiple bids and both will be rejected.

The surplus available for paying bonuses to participate policyholders is set to go down gradually, post-IPO. As a policyholder, should I be worried?

Yes and no. It is a fact that the profit-sharing arrangement is set to change and from FY25, 90 percent surplus will be available to policyholders, down from the current level of 95 percent. This could mean lower regular bonuses for you, though the change in profit-sharing ratio is not the only factor that determines the bonus rate. “Each product has a different bonus rate…also, if something more positive happens, bonuses could improve too. It all depends on how the corporation performs in relation to the (year’s) assumptions,” LIC Chairman MR Kumar said on Monday.

Besides, as Moneycontrol has often pointed out, it is best to keep your investment and insurance needs separate. Buy a large term cover - the simplest and most cost-effective form of insurance - to protect your dependents and invest through mutual funds to meet your long-term goals. Par products come with returns of 5-6 percent, opaque structure, relatively higher commissions and steep exit barriers. They don’t make for ideal long-term wealth creation avenues.