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Despite the storm, LIC IPO matters

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The stage is almost set for a blockbuster listing of the Life Insurance Corporation of India. A lot is written every day in the press. But wait! The world is not the same place as a few days ago…

Global oil prices are surging as the war Russia has inflicted on Ukraine continues. Stock markets are in a tizzy as uncertainty rules.

Financial markets do not mind prices falling. However, any uncertainty only fuels more volatility in the market. Benchmark indices like the S&P BSE Sensex and NSE Nifty shed gains. However, the selloff is sharper in mid-cap and small-cap companies. The India VIX index has flared to 30% in tandem with the surge in the global volatility index. Any level between 15-20% is considered normal. There is no change in retail fuel prices in India as the assembly election process is still underway. The government owns the oil marketing companies that sell petrol and diesel to us. They will act only when the government gives the go-ahead. Yeah! The oil prices are likely to flare up after the Uttar Pradesh assembly polls.

Inflation fears are real, and it is not clear how far the Reserve Bank of India’s monetary policy committee or MPC can hold borrowing rates low. “The immediate impact of the conflict on the Indian economy will be felt through inflation, an increase in current account deficit and rupee depreciation,” says a release by the India affiliate of FITCH Ratings, a global credit rating agency. A 10% increase in edible oil and fuel price could add 0.55% to the consumer price inflation, the agency adds.

To add to that, a widening trade deficit and a current account deficit would put pressure on the Indian rupee. The Fitch analysis suggests that a USD5/barrel (bbl) increase in crude oil prices would result in a USD6.6 billion increase in trade/current account deficit. That hurts the rupee value against major foreign currencies.

Against this backdrop of surging inflation and rising interest rates, India’s government is looking to sell shares in the Life Insurance Corporation of India or LIC, the biggest life insurance company in the country and the fifth-largest in the world. There could be a temptation to put it off till the dust settles over the markets. There are already reports that the government is considering pushing the IPO to the next financial year.

A lot is riding on the LIC offer for sale. Not just from the point of view of the LIC of India but also the financial services sector. Many new investors are coming into the stock market because of the IPO. In a volatile market, pricing such a mega offer for sale is tricky. If you price it low, the government collects less money. If you price higher, the investor appetite may dwindle, and the share price may fall sharply after listing denting investor confidence.

The government needs the IPO to sail through before the end of this month. The budget accounts for over Rs 60,000 crore at least through selling a 5% stake in the LIC of India. Putting it off would impact the government finances and the disinvestment programme. 

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