India's IPO plan likely to benefit insurance industry, says Fitch Ratings

The Indian government's proposed IPO of state-owned Life Insurance Corporation of India (LIC) will improve the accountability and transparency of the country's largest insurer and benefit the insurance industry, Fitch Ratings reported in its latest research report.

Fitch believes that the benefits may trickle down to the entire domestic insurance industry in terms of attracting more foreign interest, which could result in an increase in foreign capital inflows into the industry.

Fitch expects the IPO, once executed, may also encourage some of the other private sector insurance companies to list some of their shares in the stock market over the medium term, although the current insurance regulation does not require all insurers to be listed publicly.

The government proposed on February 1, 2020 to issue shares in LIC through an IPO to meet its highest ever disinvestment target of INR2.1 trillion, set in the union budget for 2020-2021. LIC has a premium-based market share of almost 70 percent in life insurance sector.

A publicly listed LIC will be subject to stringent disclosure requirements stipulated by the Securities and Exchange Board of India. This will create a strong culture of compliance and accountability within the insurer.

LIC is one of the prominent institutional investors in several public sector assets, and in multiple instances has obtained exceptions from the insurance regulator to increase its stake in investee companies above the regulatory ownership cap of 15 percent.

In addition, it is expected that the proposed IPO, once executed, could broaden the insurer's capital base and improve its regulatory capital position, which was 160 percent at end-March 2019, slightly above the regulatory minimum of 150 percent, the report.

Fitch further expects the state to reduce ownership only marginally in the insurer in the near term, but could gradually reduce the stake over the long-run to meet the minimum public holding requirement for listed companies.

In 2019, the government proposed to increase the minimum public holding requirement of listed companies to 35 percent from 25 percent, although many listed public sector companies are yet to comply with the 25 percent requirement.

Similarly in 2018, the government announced its decision to merge three state sector non-life insurance companies - National Insurance Company, United India Insurance Company and Oriental Insurance Company - and subsequently list them in the stock market.

The merger is likely to conclude in 2020 after being delayed almost by a year due to several factors including the insurers' weak capital strength. The government in 2017 had already listed New India Assurance Company and General Insurance Corporation of India - two of the largest insurance companies in the country - through an IPO route.

"Contrary to the industry's belief, the government did not relax the foreign-ownership cap on insurance companies in the union budget for 2020-2021. Fitch believes that relaxing the 49 percent cap will attract more international companies into the rapidly growing Indian market and promote competition, while positively contributing towards the development of distribution networks and technology usage," Fitch Ratings commented in the report.