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Union Cabinet Approves FDI of up to 20% in LIC under Automatic Route

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Union Cabinet approves FDI of up to 20%

The Union Cabinet chaired by Prime Minister Narendra Modi  approved Foreign Direct Investment (FDI) of up to 20 percent under the ‘automatic route’ in Life Insurance Corporation (LIC) of India, ahead of the mega initial public offering (IPO) of the LIC of India, the largest insurer in India is expected to be held in March 2022. 

  • It is aimed at attracting long-term foreign investors to the issue and facilitating disinvestment.
  • IPO – An IPO is the selling of securities (shares of the company) to the public in the primary market (usually to institutional investors and retail investors).

FDI Policy:

i.The current FDI policy which permits 74 percent foreign investment under the automatic route in the insurance sector does not apply for the LIC,  as it is established and governed under the LIC Act, 1956, and the law did not have any specific provision for foreign investment in the insurer.

  • Note – The current FDI policy allows FDI in the insurance sector but as LIC being a statutory corporation, is not covered under either “Insurance Company” or “Intermediaries or Insurance Intermediaries”.

ii.Thus the cabinet has made an amendment to the FDI Policy in facilitating investment in LIC upto 20 percent through automatic route which already permits 20 percent of FDI inflows for public sector banks in government approval route.

Stake Mobilisation:

i.LIC filed the draft red herring prospectus (DRHP) in which the government offered to sell a 5 percent stake in LIC that could fetch it around Rs 70,000-80,000 crore.

ii.As per industry estimates, the government expects to mobilise Rs 63,000-66,000 crore from the proposed share sale to meet its disinvestment target of Rs 78,000 crore for FY22.

Share Reservation by LIC:

i.According to the Securities and Exchange Board of India (SEBI), LIC has reserved 50 percent of the net offer (after excluding the reservation for policyholders and employees) for qualified institutional buyers (QIB), 15 percent for non-institutional bidders and 35 percent for retail individual bidders.

  • Foreign institutional investors (FII) fall under the QIB category that includes domestic institutional investors from which foreign investors could later buy LIC shares from the secondary market.

 Note – FDI inflows into India stood at USD 45.15 billion in 2014-2015 and have increased to USD 81.97 billion in 2020-21, from USD 74.39 billion in 2019-20.

Additional Info:

i.The LIC public issue is expected to be the biggest IPO of the Indian stock market. 

ii.So far, the amount mobilised from the IPO of Paytm in 2021 was the largest ever at Rs 18,300 crore, followed by Coal India (2010) at nearly Rs 15,500 crore and Reliance Power (2008) at Rs 11,700 crore.

Recent related news:

In accordance with the report by Crisil, LIC (Life Insurance Corporation of India), India’s largest IPO (Initial Public offering)-bound national insurer and 3rd strongest insurance brand globally, LIC (Life Insurance Corporation of India), offers the highest Return on Equity (RoE) at 82% amongst all its global peers.

About Life Insurance Corporation (LIC) of India:

Headquarters – Mumbai, Maharashtra
Chairperson – M R Kumar