FEMA Rules Changed To Allow 20% Foreign Investment In LIC’s Public Offering

The government has changed the restrictions of the Foreign Exchange Management Act (FEMA), allowing up to 20% foreign direct investment in the insurance giant LIC.

The government intends to sell a portion of its stake in LIC through an Initial Public Offering (IPO). The LIC submitted the Draft Red Herring Prospectus (DRHP) for the IPO with the markets regulator Sebi in February.

The SEBI approved the draught papers last month, and the insurer is preparing to submit a request for proposal with revisions.

Following Cabinet approval, the Department for Promotion of Industry and Internal Trade (DPIIT) changed its Foreign Direct Investment (FDI) policy on March 14 to make it easier for foreign investors to participate in LIC ahead of the mega-project.

FEMA notification was required to put into effect the measures DPIIT announced in a press release, such as modifications to the FDI policy that will allow major foreign portfolio investors to subscribe to LIC shares.

“These regulations may be referred to as the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022,” according to a newly published gazette announcement.

The notification adds a paragraph to the current policy that allows up to 20% FDI in LIC via the automatic route.

Due to the fact that the foreign inflows ceiling for public sector banks is 20% under the current FDI policy, it has been agreed to allow foreign investment of up to 20% in LIC and other similar corporate entities.

“Foreign investment in LIC is subject to the terms of the Life Insurance Corporation Act, 1956 (LIC Act) as amended from time to time, as well as those sections of the Insurance Act, 1938, as amended from time to time, as are applicable to LIC,” it stated.

The SEBI has cleared the draught prospectus for the government’s sale of a 5% interest for an estimated 63,000 crore, paving the way for the country’s largest-ever public offering.

According to the draught report, international actuarial firm Milliman Advisors estimated LIC’s embedded value, which is a measure of the consolidated shareholders’ worth in an insurance company, to be at 5.4 lakh crore as of September 30, 2021.

Although the DRHP does not specify the market value of LIC, it is estimated to be roughly three times the embedded value, or around 16 lakh crore, according to industry standards.

The LIC public offering is projected to be the largest in Indian stock market history. LIC’s market value will be comparable to leading firms like RIL and TCS once it gets listed.

Paytm’s IPO in 2021 raised the most money ever at 18,300 crore, followed by Coal India’s IPO in 2010 at around 15,500 crore and Reliance Power’s IPO in 2008 at 11,700 crore.