IPO quota for LIC policyholders opens up a Pandora's Box

If you are an LIC policyholder, chances are, you would have received an automated voice call from LIC, asking you to avail the opportunity of subscribing to LIC IPO because a special quota has been allotted to LIC policyholders. Most of the policyholders would have wondered about such a thoughtful move by LIC. Especially because nobody really cared to offer a slice of its IPO to the common man.

The moot point is whether other companies did not care to reserve quota for its customers in their IPO, or whether they were simply following the existing norms that do not permit extending such privileges to customers?

LIC's DRHP mentions that up to 10% of the issue size is reserved for LIC policyholders. The issue is, fixing of such quota is, prima-facie, not permissible, as per Issue of Capital and Disclosure Requirements (ICDR) Regulations.

What do current ICDR regulations state?

LIC policyholders may be classified as a class of customers for LIC, and allotting reservation to a class of customers is not covered in ICDR regulations. The clause 31 (1) with heading Reservation on a Competitive Basis states:

The issuer may make reservations on a competitive basis out of the issue size excluding promoters' contribution in favour of the following categories of persons:

a) Employees

b) Shareholders (other than promoters and promoter group) of listed subsidiaries or listed promoter companies.

Plain reading of the above clause shows that no reservation has been provided in the regulation for policyholders.

About 27 statutory changes have been made by the government that help LIC to make a smoother public listing. Regulations that reduced the amount of equity to be diluted; increase in timeline of further 20% equity dilution to five years; have removed strategic disadvantages for LIC listing process.

It seems that all these statutory changes were still not enough to tailor LIC's DRHP to fit the current norms.

In absence of any relevant provisions, it is unclear how LIC proposed up to 10% reservation for policyholders? Fortune India sent a questionnaire to LIC. But even after a week the questionnaire remained unanswered despite many follow ups with the company.

Making exception for LIC will create further regulatory issues

If LIC policyholders are the class of customers who are getting the opportunity to be part of LIC IPO, then the same treatment must be meted out to a class of customers of any other company.

For instance, another private insurance company's policyholder would also need to be classified as a class of customer? In the same light, subscribers of a telecom service, account holders of a bank, subscribers of a mobile app, and more such customers may be classified as a class of customer with regards to any company.

A market veteran on condition of anonymity asks how would the regulator differentiate between a policyholder and a depositor of a bank when it comes to fixing a quota for them in an IPO. "Can you allow a policyholder of LIC to get up to 10% quota in an IPO but deny the same to a depositor of a bank as both are in a sense, customers," he asks.

As per principles of natural justice every company with listing aspirations should now be able to reserve a quota of IPO for their own class of customers.

How feasible it would be for a regulator to permit a quota for policyholders of LIC but debar other companies from extending the same privileges to their customers?

Can exemptions be made?

The current ICDR regulations, Chapter - Power to relax strict enforcement of the regulations, Clause 295A, states - The Board may exempt any person or class of person from the operation of all or any of the provisions of these regulation for a period as maybe specified but not exceeding the 12 month period for furthering innovation related to testing the new products, services, processes, business models etc. in a live environment of regulatory sandbox in the securities market.

But providing an insurance policy is neither a new product nor a new service or process.

Since LIC has not responded to Fortune India's queries, it is not clear whether it has already secured SEBI exemption for the 10% quota for policyholders!

For other IPOs in the making, it would be interesting to know on what basis SEBI grants, or will be granting, permission to reserve IPO quota for LIC policyholders.