Why does the government plan to change the FDI policy ahead of the LIC IPO?

Let me clarify that there is no change in the FDI policy that is required. The only thing that is required is some amount of simplification so that the FDI limits can be made applicable to LIC IPO also. As of now it is still not clear if the LIC IPO will happen in FY22 or in FY23, this FDI tweak is going to be one of the enabling features ahead of the IPO. It is quite clear that the FDI simplification will happen before LIC announces details of the IPO and files DRHP.

In a statement to the press, Anurag Jain, Secretary of the Department for Promotion of Industry and Internal Trade (DPIIT) disclosed that the final decision will be taken by the Cabinet and the proposal for the same has already been put up by the DPIIT. The success of the LIC IPO is the key to the government achieving or at least getting close to its rather ambitious disinvestment targets for this year, which is close to Rs.175,000 crore.

Let us first understand what exactly is required in the FDI tweak. Currently, Indian insurance players can get 74% FDI through automatic route. If they need FDI above 74%, only then the approval of the Cabinet Committed on Economic Affairs (CCEA) is required. However, the LIC Act that governs LIC is separate from IRDA Act and hence it is incumbent that the amendment has to also be made in LIC Act to facilitate foreign direct investments.

How exactly is FDI defined in the Indian context from a capital markets point of view. In India, FDI as per RBI definition entails the purchase of a stake in a listed company of 10% or more by an individual or entity based abroad. This also includes any foreign investment in an unlisted firm. If the FDI rules are cleared under LIC Act, it opens the doors for international funds to participate ahead of the IPO and also pick up stakes later.

SEBI rules for FPI and FDI investments permit flows into insurance companies. However, the LIC Act has no provision for foreign investments. Hence, to empower foreign participation, the LIC Act will have to be aligned with the provisions of SEBI. If the IPO size is above Rs.70,000 crore, then surely a lot of institutional support is going to be required. The idea here is to just ensure that the preparatory tasks on FDI are done before the IPO.