[Arjya B. Majumdar teaches Securities Regulation and related subjects at the Jindal Global Law School. With acknowledgements to the immensely helpful discussions with Mr Sayantan Dutta, Partner, Shardul Amarchand Mangaldas]
On 27 April 2022, the Life Insurance Corporation of India (‘LIC’) filed its Red Herring Prospectus (‘RHP’) with the Securities and Exchange Board of India (‘SEBI’) for its Initial Public Offering (‘IPO’), which made its debut on 4 May 2022. Assuming full subscription of the offer of 221,374,920 shares at the cap price of INR 949, the issue size will possibly be around INR 21,000 crores, making it by far the largest IPO in Indian history. To place this in perspective, the previous largest IPO in India was that of Paytm, at INR 18,300 crores.
While the size of the issue and the corporation itself are bound to draw interest, there are a number of points of legal interest as well. One, in particular, is the provision of a reservation to the policyholders of LIC. This provision in the DRHP allows the LIC to set aside up to 10% of the offer size. With the offer size being up to 221,374,920 shares, the policyholder reservation portion would approximate up to 22,137,492 shares. The RHP also allows for policyholders to apply for shares at a discount to the offer price or the price band, as the case may be.
The SEBI (Issue of Capital and Disclosures Requirements) Regulations 2018 (‘ICDR’) governs all public offers of securities, including initial public offers. The ICDR allows for a reservation to be made for employees of the company undertaking a public offer as well as a reservation for shareholders of associate listed companies. It is not unusual for issuer companies to offer employee reservations and discounts in regular IPOs. However, this is the first instance of a company offering a reservation and a discount to its customers, i.e., its policyholders.
A crucial question then arises: under what law is LIC able to offer a reservation or a discount to its policyholders? The answer lies on page 253 of the RHP which refers to an enabling provision in the Life Insurance Corporation Act, 1956 (‘LIC Act’). Section 5(9) of the LIC Act, which was amended in September 2021, now provides for this exact reservation and discount as follows:
“Notwithstanding anything contained in any other law for the time being in force—
(a) regarding various categories of persons in favour of whom an issuer may make reservations on a competitive basis, in relation to a public issue, the Corporation may, at any time during the period of five years from the commencement of section 131 of the Finance Act, 2021, make a reservation on a competitive basis, to an extent of up to ten per cent. out of the issue size, in favour of its life insurance policyholders as one of the reserved categories for such public issue:
[…]
Provided also that the policyholders in favour of whom reservation is made under this sub-section may be offered shares at a price not lower than by more than ten per cent. of the price at which net offer to public is made to other categories of applicants;”
It is interesting to note that these amendments were brought in barely six months prior to the filing of the RHP with SEBI. Clearly, the issue of offering reservations and discounts to policyholders has been on the Finance Ministry’s mind with a view to maximise interest and participation in the IPO.
It is also interesting to note that, technically speaking, the LIC is not a company registered under the Companies Act, 1956 or the Companies Act, 2013. The creation of the LIC is attributable to the LIC Act, which describes the LIC as a body corporate, having perpetual succession and a common seal with the power to acquire, hold and dispose of property, and capable of instituting and defending legal proceedings, much like a company registered under the Companies Act. The LIC Act, along with its multifarious and varied subordinate legislation, creates an entirely separate legal ecosystem within which LIC operates. It remains a corporation, but not a company.
Much of this regime was amended through the Finance Act of 2021 and the LIC (Amendment) Rules 2021 in preparation for its IPO. Many of these changes referred to bringing in and strengthening the governance of the LIC to bring it at par with listed companies.
Another interesting amendment was brought into the Securities Contract (Regulations) Rules, 1957 (‘SCRR’) in 2021. Under rule 19(2)(b) of the SCRR, companies must list at least 10% of their post issue capital and, over a period of three years, increase the public shareholding to 25%. However, in a 2021 amendment, a sub-rule (iv) to rule 19(2)(b) was added, which now allows extremely large, unlisted companies, having a post issue capital in excess of one lakh crore, to list with a public shareholding of five percent. The caveat is that this public shareholding must be increased to 10% within two years of listing and up to 25% within five years of listing.
The Draft Red Herring Prospectus (DRHP) filed by LIC on 13 February 2022 mentions an offer size of 316,249,885 shares, which amounted to 5% of the post issue paid up share capital of the corporation. However, the Russian invasion of Ukraine and other factors have led to volatile market conditions in the past few months, which raised concerns as to the prudency of the original offer size. The offer size was subsequently reduced to its present 221,374,920 shares, which represents 3.5% of the post issue paid up capital of LIC. Ordinarily, under Schedule XVI of the ICDR, this would require a fresh filing of the Draft Red Herring Prospectus. Fortunately, recognizing the extraordinary circumstances in market conditions, the national interest that this disinvestment represents, and the strict timelines set by the Government of India, SEBI exempted the requirement of filing a fresh offer document.
While the present offer size amounts to 3.5% of the post offer paid up share capital, it is also interesting to note that in the consent letter issued on behalf of the Government of India, an enabling provision exists to increase the offer size to 5%. However, whether and when this increase may take place is unknown. One may make a safe assumption though, that a separate relaxation has been provided by SEBI in exempting LIC from the requirements of rule 19(2)(b)(iv) of the SCRR for now. It also remains to be seen whether the requirement in the proviso to rule 19(2)(b)(iv), viz., the required increase in public shareholding over the next five years, will also be relaxed.
Securities market regulators like SEBI must play a balancing act between promoting investments in securities markets while, at the same time, protecting investors from risks. In order to do this, regulators would be hampered by a one-size-fits-all approach. Through multiple instances, SEBI has shown that it is reactive to market conditions (as noted elsewhere in this blog post). In the case of India’s largest insurance company, which is slated to become one of India’s largest companies by market capitalization, SEBI has once again shown considerable flexibility and responsiveness to the needs of the capital markets.
– Arjya B. Majumdar