The government has amended the Foreign Exchange Management Act (FEMA) rules, paving the way for up to 20 per cent foreign direct investment by insurance giant LIC. The government plans to dilute its stake in LIC through an Initial Public Offering (IPO). In February, LIC filed a Draft Red Herring Prospectus (DRHP) for the IPO with market regulator SEBI. Last month, SEBI approved the draft document, and the insurer is submitting a request for a proposal with changes.

Following Cabinet’s approval, the Department of Industry and Domestic Trade Promotion (DPIIT) on March 14 revised its Foreign Direct Investment (FDI) policy to facilitate overseas investment in LIC ahead of a mega public offering. FEMA notification is required to implement DPIIT’s regulations issued via press notes, including changes to the FDI policy that would allow large foreign portfolio investors to subscribe to LIC shares. “These rules may be referred to as the Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules 2022,” a recently published communiqué notice said.

The circular inserts a paragraph into the existing policy allowing up to 20 per cent of foreign direct investment into the LIC through the automatic route. Since, under the current FDI policy, foreign inflows to government-approved public sector banks are capped at 20 per cent, it was decided to allow foreign investment up to 20 per cent in LICs and other such legal entities.

“Foreign investment in the LIC shall be subject to the provisions of the Life Insurance Companies Act 1956 (LIC Act), as amended from time to time, and the provisions of the Insurance Act 1938, as amended from time to time, as applicable to the LIC,” it said. SEBI, laying the groundwork for the country’s largest-ever public offering, has approved a draft prospectus for the government to sell a 5 per cent stake at an estimated price of Rs 63,000 crore.

According to the draft document, international actuarial firm Milliman Advisors has set the LIC’s embedded value, a measure of the combined shareholder value of an insurance company, at around Rs 540,000 as of September 30, 2021. Although DRHP did not disclose the market valuation of LIC, it is roughly three times the embedded value of about Rs 160 crore according to industry standards. The LIC public offering is expected to be the largest IPO in the history of the Indian stock market. Once listed, LIC’s market valuation will rival top companies such as RIL and TCS.