LIC may come out with IPO soon

LIC may come out with IPO soon

Life Insurance Corporation, LIC, of India chairman S B Mathur said the corporation will either have to hit the capital market with an initial public offer, IPO, soon or the government would need to capitalise the institution. This is because LIC needs Rs 2,000 to Rs 3,000 crore (Rs 2030 billion) annually to meet the norms on solvency.

The Parliament will have to change the LIC Act to allow the state-run insurance company to tap the market. The government would also need to recapitalise the financial institution in order to make the pricing of LICs shares attractive for public participation.

Growing at a rate of 60% in terms of new business income, LIC needs to ensure adequate solvency margin as per the norms laid down by the regulator the Insurance Regulatory and Development Authority, IRDA.

Solvency margins are calculated at four% of the reserves (that is the liabilities the insurance company could face) plus 0.3% of the sum at risk.

We have tackled the solvency margin issue for now, having provided for Rs 14,000 crore (Rs 140 billion) as on March 2004 for the business underwritten to date, said Mathur.

This accounts for 110% of the solvency margin, against the requisite 150% laid down by the IRDA. The total requirement stands at Rs 16,800 crore (Rs 168 billion) as on March 31, 2004, which will be provided for by March 31, 2005.

During the current financial, LICs new premium income rose by 62.71% to Rs 3,476.34 crore in the first six months against Rs 2,136.57 crore in the corresponding period of 2003-04.

Mathur anticipates that LIC would need to put in an additional Rs 6,000 crore (Rs 60 billion) by March 2005. Currently we are meeting the required solvency margins from surplus funds, which cannot be a continuous practice, he added.

Hence LICs plans to go for an IPO is critical to its ability to meet regulatory norms. This is similar to shareholders of private life insurance companies infusing additional capital to support the exponential business growth.

Capital is required to meet the statutory reserves requirement as laid down by the insurance regulator. LIC is looking at an IPO as recommended by its consultant, Deloitte & Touche.

Private insurance companies, on the other hand, are hoping that the cap on foreign direct investment, FDI, be raised from the current 26% to 49%.

This will ease the financial burden on Indian promoters who are required to infuse the majority of funds in accordance with their stake holding.

Recapitalisation is necessary to dilute the earnings per share, since the minuscule Rs 5 crore paid-up capital of the corporation would result in an abnormal pricing of its shares during a public float, said industry sources.

Today LIC is running a balance sheet size of Rs 3,40,000 crore (Rs 3400 billion) on a share capital base of just Rs 5 crore. According to latest available data, the surplus for fiscal 2002-03 amounted to Rs 40,101 crore (Rs 401.01 billion). The surplus helps calculate the profitability of the corporation in terms of income minus expenses.

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