The government may choose to sell shares in the Life Insurance Corp of India in two stages, given the size of the sale, people familiar with the matter said.

It may offer 5–6% of the company’s equity through a large Initial Public Offering (IPO), and then, follow up the following year with a follow-on public offer for 4–5%. The idea, four people familiar with the matter said, was to leave enough liquidity and appetite in the market for issues of others, including start-ups. And it’s almost a given that the follow-on will be at a premium, the people added.

Although an official valuation of LIC is yet to be completed, its estimated value is expected to be around ₹12–15 lakh crore. An IPO of 10% would mean the size of the offering would be around ₹1.2 lakh crore to ₹1.5 lakh crore, which is unprecedented. While there is no doubt that the entire 10% share sale could be fully subscribed, it might “crowd out” private firms interested in raising funds from the equity market, which may not be good for the economy as a whole, the people who are involved in the LIC share sale said.

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The equity market is buoyant. It has exhibited immense interest in food delivery startup Zomato’s ₹9,375 crore IPO that was subscribed 38 times. Earlier in the month, infrastructure firm GR Infra saw its share sale subscribed 102.4 times and green tech firm Clean Science and Technology, 91.7 times. The government would like to strike a balance between achieving its disinvestment target and giving space to private firms in the equity market, the four said.

Budget 2021–22 has set a disinvestment target of ₹1.75 lakh crore, and the LIC IPO is crucial for meeting this; total disinvestment proceeds so far this year is only ₹7,645.70 crore (as on July 14).

“A final call on the size of the LIC IPO has not been taken as yet. Meeting the disinvestment target is not the sole consideration for the government. It will consider impact of the IPO on the economy as a whole before finalising its size,” one of the four officials said, adding that the public offer is expected to hit the market by the end of third quarter or in the fourth quarter of the current financial year.

Minister of state for finance Bhagwat Kishanrao Karad on July 19 told Parliament that the IPO of LIC is “planned to be completed” during the current fiscal year. “Several disinvestment transactions are expected to be completed during the year,” Karad said.

“It would be prudent for the government to offload its stake in LIC gradually. It can command a significant premium in the FPO next year. It can continue to dilute its stake in small proportions over the next five years to meet the regulatory requirement and command a premium every time,” a second person said.

According to the new listing norms of the Securities and Exchange Board of India (Sebi), companies with a market value of over ₹1 lakh crore will be required to achieve at least 10% public shareholding in two years and at least 25% within five years from the date of listing.

Union finance ministry, the department of financial services (DFS) and the department of investment and public asset management (Dipam) did not respond to an email query on this matter. DFS regulates financial institutions such as LIC and Dipam is responsible for disinvestment of government’s equity in central public sector enterprises (CPSEs). Both departments are arms of the finance ministry.

A Mumbai-based investment banker who asked not to be named said: “SEBI’s new norms released in February 2021 will be in favour of the LIC IPO as it allows the issuer to gradually dilute stake without hampering the sanity in the market. We expect the demand for LIC paper to be so huge that it will be absorbed easily by the huge interest shown by institutional players. However, concerns of liquidity squeeze post the IPO might see the government taking a conscious decision to opt for smaller dilution of stake.”

Nilaya Varma, co-founder and CEO of consulting firm Primus Partners, said the government will take a prudent and pragmatic approach. “The markets are buoyant and we have seen record fund raising through IPOs this year and many large firms looking to raise funds in the second half . Given the expected supply in terms on new IPOs and size of divestment which will be more than five times the largest IPO planned, we believe the cautious approach followed by government will help in maximizing value for LIC.”

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