LIC shares crash 9% after Centre's discounted stake sale
What's the story
Shares of Life Insurance Corporation of India (LIC) have witnessed a massive sell-off on Tuesday, with a decline of nearly 9%. The drastic fall comes after the government announced a new stake sale in the country's largest insurer at a steep discount to its current market price. The move has triggered heavy selling pressure on LIC's shares.
Price impact
OFS floor price contributes to fall
The government's decision to set the floor price for its offer for sale (OFS) at ₹382 per share has contributed to the fall.
The floor price is nearly 11% lower than LIC's closing price on Monday.
This discount is the main reason behind the sharp decline in stock value as it puts pressure on market prices when a large shareholder sells shares at a steep discount.
Sale strategy
Government to sell up to 6.5% stake in LIC
The government plans to first sell a 2% stake in LIC through the OFS, with an option to sell another 4.5% if demand permits. This could bring the total stake sale up to 6.5%.
If fully sold at the floor price of ₹382 per share, the government could raise around ₹31,400 crore from this move.
The OFS opened for non-retail investors on Tuesday and will open for retail investors on Wednesday.
Sale rationale
Reasons behind the stake sale
The government has two main reasons for the stake sale.
First, it needs to raise public shareholding in LIC. After its 2022 IPO, the government held a whopping 96.5% stake in the insurer, with public shareholders holding only 3.5%.
If the full 6.5% option is exercised in this OFS, public shareholding will rise to some 10%, meeting LIC's requirement of raising minimum public shareholding to 10% by May 2027.
Financial boost
Boosting disinvestment receipts
The second reason behind the stake sale is to give a major boost to the Centre's disinvestment receipts.
The government has set a disinvestment target of ₹80,000 crore for this fiscal year and has already raised some ₹21,200 crore through stake sales in companies such as NHPC, Coal India, and Indian Railway Finance Corporation.
A full LIC stake sale at the current OFS floor price could add over ₹31,000 crore to that tally.