The government can be pleased that its sale of a stake in state-run Life Insurance Corp of India went off without a hitch with the Initial Public Offer, the country’s biggest ever, getting orders for nearly three times the shares up for grabs.

But with the global selloff hitting Indian stock markets, that “pop” phenomenon – the jump in the stock price during the first day of trading – for LIC investors may not happen, or it could be so minuscule as to not matter.

Many IPO investors hope the shares will rise on the first day of trading though some offerings go south like digital giant Paytm whose stock sank 27 per cent on its debut and is now trading 74 per cent below the offer price. Food delivery firm Zomato, meanwhile, had a strong start last summer but its shares have since shed 20 per cent in value.

LIC looks headed for a subdued debut when its stock is listed on the stock exchange on May 17 as demand for the shares in the grey market, the unofficial market for financial securities, has plummeted. The insurer’s shares are trading at a tiny premium of Rs 8-Rs 10 a share over the issue price. That’s a massive 90 per cent below the premium of Rs 100-Rs 105 that the shares were commanding a week earlier when the IPO opened.

A lot, though, has happened in the past week to take the shine off the stock market and hence LIC shares. For starters, last Wednesday, the very day the IPO opened, the Reserve Bank of India, hiked interest rates by a surprise 40 basis points, the first time it has tightened monetary policy since 2018.

The central bank acted at an emergency meeting, fearing it was going to be behind the interest rate hiking curve, just hours before the US Federal Reserve increased its key lending rate by 50 basis points. Like the Indian central bank, the Fed signalled that more rate hikes are coming, all dampening factors for share markets.

Downturn hurting outlook
Dealers reported that the downturn in stock market sentiment is heavily hurting LIC’s listing outlook. The oversubscription of 2.95 times was somewhat below what the LIC was hoping for and this could also affect the first day of trade. The cash-strapped government needed to go ahead with the IPO in an effort to help plug its yawning fiscal deficit. But economists said it wasn’t the greatest time to stage the IPO with the Ukraine war, inflation, interest rate hikes and slowing economic growth fuelling bearish sentiment.

Analysts are saying that to get the best advantage from the shares investors need to take a medium- to long-term view on LIC and not look for short term gains: ”LIC will be a good long-term bet and will play well on the growth story of the underpenetrated insurance industry," said B. Gopkumar, chief executive of Axis Securities.

Cold feet in the beginning
The LIC offering was due to be held last year but was derailed by the pandemic. The government had planned to sell the stake in March but got cold feet when the share market reacted badly to Russia’s invasion of Ukraine and was rattled by economic slowdown fears.

Finally, the government decided to go ahead with the sale in April. It urgently needs the proceeds from the IPO to help plug a widening fiscal deficit that is being stoked by soaring energy and other commodity import costs.

But to make the IPO a success, the government cut the planned size of the offering by a massive 60 per cent and slashed its valuation by around 50 per cent. The goal was to ensure that “even if we have a little bit of a constrained environment, we can still pull it off,” said disinvestment secretary Tuhin Kanta Pandey.

Govt collections
While the government will collect some Rs 210 billion from the offer, that’s far below its initial goal of collecting Rs 500 billion for its stake in the 65-year-old insurer which is a household name and enjoys an unmatched reach across the nation with over 1.3 million agents. Many first-time investors opened stock market accounts just to invest in the company whose valuation made it the cheapest in the sector.

“Demographic tailwinds” thanks to India’s 1.4-billion population and still widespread under-penetration of the insurance market will fuel the industry’s “multi-decadal growth” and LIC, as market leader, “is poised to benefit,” Samco equity research head Yesha Shah said. Generous discounts being offered to small investors, employees and policyholders to buy into the LIC IPO were “the cherry on the cake,” Shah added.