LIC IPO: 10 Risk Factors To Consider Before Investing In India’s Biggest IPO

Claiming the initial public offering (IPO) of Life Insurance Corporation of India (LIC) to become the biggest IPO of India, the Government of India has been encouraging Indian citizens and foreign investors to invest in the upcoming LIC IPO. The insurer filed its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (Sebi) on Sunday, January 13. In the prospectus, it has cautioned investors to consider various internal and external risk factors involved, before investing. 

Here’s a look at what these risk factors are. 

Internal Risk Factors   

1. Constrained Operational Effectiveness: Due to multiple lockdowns and various other restrictions imposed due to Covid, not only was there an impact on the company’s investment portfolio, LIC agents also could not sell their products and there was an increase in their expenses to bypass “the restrictions brought in to address the spread of Covid-19 and the adverse changes in population mortality/morbidity or utilization behaviours,” stated the report.   

2. High Death Claims: Due to Covid, there has been an exponential spike in the death claims. For fiscals 2019, 2020 and 2021 and the six months ended September 30, 2021, “our insurance claims by death in benefits paid (net) were Rs 171,288.42 million, Rs 175,279.87 million, Rs 239,268.94 million and Rs 217,341.50 million, respectively, on a consolidated basis, which were 6.79 per cent, 6.86 per cent, 8.29 per cent and 14.47 per cent of our total insurance claims, respectively,” states the report.  

3. Adverse Impact Due To Brand Name: Since there was higher demand for policies due to outbreak of Covid, many employees and agents of LIC misused the situation under the LIC brand name. Due to misconduct and frauds by such people using LIC’s brand name, there has been a severe impact to the brand.   

4. Ineffective Risk Management Tools: Due to the inherent limitations in the design and implementation of such a system, including internal control environment, risk identification and evaluation, effectiveness of risk control, and information communication, the existing systems may not be adequate or effective in identifying or mitigating the risk exposure in all market environments or against all types of risks.  

5. Housing Finance Activities: In January 2019, LIC got into a merger with IDBI Bank, and the Reserve Bank of India (RBI) stipulated that only one entity can continue with housing finance activities. “… the RBI in its Approval Letter has stipulated that either IDBI Bank or LIC Housing Finance Limited… will have to cease conducting housing finance activity within a period of five years from the date of the Approval Letter and that housing finance activity shall be conducted only by one entity,” stated the DRHP. Moreover, LIC has to adequately capitalize IDBI Bank to ensure it meets the minimum capital requirements for a period of at least five years. This may have an adverse effect on LIC’s financial condition, results of operations and cash flows. 

External Risk Factors   

1.Downturn in India’s Macro Economy: LIC cautioned that any downfall in the Indian economy is going to affect them as LIC is majorly based in India. “Our performance and the growth of our business are necessarily dependent on the health of the overall Indian economy. Therefore, any downturn in the macroeconomic environment in India could adversely affect our business, financial condition, results of operations and cash flows,” states the report.

2.Global Financial Instability And Volatility: The economic and market conditions in other countries, including conditions in the US, Europe and emerging economies in Asia have a severe impact on Indian economy. As the DRHP suggests, financial instability in other countries may cause increased volatility in Indian financial markets and, directly or indirectly, adversely affect the Indian economy and LIC’s business, financial condition, results of operations and cash flows.  

3. Legal Uncertainty: The rules and regulations change often and it is difficult to predict how any upcoming financial regulation, be it on a global basis or in India, may affect business. “Adverse application of corporate and tax laws may adversely affect our business, financial condition and results of operations,” LIC’s DRHP states.   

4. Risks Related To Equity And Shares: The determination of the price band is based on various factors and assumptions and will be determined by “our Corporation and the Selling Shareholder (President of India acting through the Ministry of Finance.” Therefore, the market price of LIC’s equity shares may fluctuate due to several factors and one should take consider them before investing.   

5. Downgrade In India’s Sovereign Debt: India’s sovereign debt rating could be downgraded due to several factors, including changes in tax or fiscal policy or a decline in India’s foreign exchange reserves, states the DRHP.