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India puts checks in place for LIC, foreign holding may be capped at 20%

India puts checks in place for LIC, foreign holding may be capped at 20%

The government may limit overseas investment in state-owned Life Insurance Corp. (LIC) of India at 20%, at par with that for public sector banks.

The country’s biggest life insurer is expected to make its initial public offer (IPO) later this year. Expected to be the biggest ever in the Indian market, it’s pegged at about Rs 1 lakh crore. The LIC Act, which governs the insurer, does not mention foreign investment and also limits any shareholder other than the central government to a maximum 5% stake.

“A 20% limit still gives wide headroom given the size of LIC,” said a government official, explaining why the Centre may seek this lower limit against the 74% overseas investment allowed in private sector insurers and banks. It’s capped at 20% for public sector banks. Under foreign portfolio investment (FPI) regulation and Foreign Exchange Management Act (Fema) rules, 24% overseas investment is typically allowed in listed companies, unless there are sector-specific caps as in insurance.

“These are some issues which are being deliberated,” said the official cited above, adding that the government may not need to amend the LIC Act for such an enabling provision.

‘May Need Parliament Nod’
The limit could be specified through a press note by the Department for Promotion of Industry and Internal Trade (DPIIT) under the foreign direct investment (FDI) policy. An independent foreign investment expert said the government may need parliament‘s approval.

“The LIC Act mandates that only 5% can be held by non-government entities. This means FPIs may end up with lower than 5% share in LIC. Moreover, any change in this cap would require an amendment in the Act,” he said. FPIs held a 10.34% stake in State Bank of India, the country’s largest bank, at the end of the June quarter. The government has shortlisted 10 merchant bankers, including Goldman Sachs Group Inc., J P Morgan Chase & Co and ICICI Securities to manage the LIC issue. Actuarial firm Milliman Advisors LLP India has been engaged for assessing the embedded value of LIC, while Deloitte and SBI Caps have been appointed as pre-IPO transaction advisors.

Securities Contracts (Regulation) Rules have already been amended to allow companies with an expected market capitalisation of more than Rs 1 lakh crore at the time of listing to sell only 5% of their shares against the earlier limit of 10%, a move intended to benefit the LIC stake sale.

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