Warning signs ⚠️

LIC to crypto, information is now hidden in clues

This is edition 372 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

There’s a bit of a “Cluedo” element to our Friday edition, where only reading cryptic signs will tease out information. The government’s been dithering on LIC’s valuation, sending out uneasy signals about its much-touted IPO. China’s not willing to let anybody, Chinese or foreign, read the financial tea leaves. And the front page of a newspaper can tell you a lot about fads. And if they’re already over.

It’s a fun Friday read, so jump in!

LIC’s hiccups

Almost every day, there’s some buzz around the highly anticipated IPO of the Life Insurance Corporation of India (LIC). The latest ones involve valuations (yet again) and lawyers (that’s a new one). 

But to understand that, let’s rewind to a story that my colleagues Seetharaman and Anand wrote on 2 August. Their headline was, “Why India shouldn’t repeat IRCTC’s valuation misstep with LIC’s IPO”.

Back in 2019, IRCTC, or the Indian Railway Catering and Tourism Corporation, a government-owned entity dealing with railway bookings, was valued at US$700 million before its IPO. When it listed on the stock exchange, its price jumped more than 2x. The government drew flak for undervaluing the company.

Based on estimates by my colleagues in August this year, they believed that LIC would be valued at Rs 13,00,000-15,00,000 crore (US$175-202 billion) based on what the chief economic advisor, KV Subramanian, has indicated. 

So, anything below that could potentially signal that again, the government of India is undervaluing a prized asset. 

In early September, another bit of news popped up about LIC’s valuations. And this time the indication was from Nilesh Sathe, a former member of the Insurance Regulatory and Development Authority of India. So, Seetharaman revised his estimate and wrote in edition #365 of this newsletter that LIC’s valuation may, in fact, be closer to Rs 9,00,000 crore (US$123 billion).

If LIC is only worth this much, or possibly even less, going by its dependence on single-premium policies, what explains the Centre’s much more optimistic estimate, especially considering it came well before the current bull run in the stock market?

What does the government know that others don’t?

Well, the latest ‘reports’ in Livemint suggest that the government may have toned down its valuation expectations despite all the buzz around the stock in a roaring bull market, and doesn’t know anything that the others don’t. 

India’s government is seeking a valuation of between ₹8 lakh crore ($109 billion) to ₹10 lakh crore for Life Insurance Corporation, in what’s slated to be the nation’s biggest initial public offering.

The possible valuation is based on preliminary talks and may change after detailed discussions, due diligence and an official valuation report, according to people with knowledge of the matter, who asked not to be identified as the deliberations are private.

But again, it may change after ‘detailed discussions’. And that’s the funny bit. The LIC IPO was first hinted at by India’s finance minister during her budget speech in February 2020. The timeline given was a year. 

That didn’t happen. 

Then the timeline got pushed by another year. So, in all this time, even with the government’s urgent need to refill its coffers, it’s just a tad bit odd that the talks are still in their preliminary stages. Makes one wonder whether the IPO will actually take place this year. With further delays, this ‘peak’ bull market could evaporate slightly. And with it will come a lower valuation for LIC.

Meanwhile, private companies continue to line up for IPOs to capitalise on the market frenzy. 

The other LIC-related buzz is in the lawyers’ circles. And it’s linked to opportunity cost:

India's plans to list state-run Life Insurance Corporation (LIC) face an unusual problem: domestic law firms are shying away from advising the government, deterred by the low fees on offer at the time of a lucrative boom in corporate stock listings.

LIC's massive size and complex business structure and products make it a "nightmare" for lawyers to draft the prospectus, he [Nitin Potdar, an M&A partner at top Indian law firm J. Sagar Associates] added.

The unappealing fees are another dampener, said law firm partners, who spoke on condition of anonymity to avoid government reprisals.

That could explain why the government had to invite bids from law firms to advise it a second time. The first request for proposal (RFP) from law firms in July 2021 saw muted interest. With average IPO fees for law firms jumping 30% of late, why settle for low fees from the government? 

But maybe it’s even linked to the valuation headache. 

Usually, it is an investment bank (there were 18 bidders) that does the valuation, and whose name will be dragged in the mud if there’s too much money left on the table and the shares pop on listing. Or even if the valuation is too high and there’s lacklustre demand (not that it actually impacts their future business too much).

But maybe Indian law firms fear reprisals by association in either scenario for this mega IPO?

This sure-shot winner of an IPO seems to be going through quite a few hiccups. 

China doesn’t want anyone to analyse its economy

When foreign analysts and investors try to dissect what’s happening in an economy without having boots on the ground, they’re always relying on official numbers released by the government. Or private agencies and domestic investors that do the data-scraping. 

For emerging markets, though, it’s usually data from private agencies and market commentators because governments are known to fudge data to paint themselves in a better light. 

But what if the government decides to control the narrative and crack down on financial bloggers?

China has launched a crackdown on financial blogs and social media, a move that risks exacerbating the difficulty of obtaining reliable data about the world’s second-biggest economy.

[...]

Last month the Cyberspace Administration of China embarked on a “special rectification” campaign. The internet regulator is clamping down on market sceptics and those who voice pessimistic opinions about the Chinese economy.

And some ‘outside’ investors are getting worried.

A Hong Kong-based investor in China bonds said the moves would further limit insights of which debt issuers are “trustworthy” because blogs and social media are at times the only places with information on company personnel changes and regulatory investigations or arrests.

This is happening at a time when one of China’s largest property developers, Evergrande, could default on at least part of its total debt of US$300 billion. Pockets of protest by investors in Evergrande’s wealth management products are springing up and there are fears of a contagion. Analysts think that Evergrande is just one such company that binged upon debt, and that there could be more such problematic companies that’ll soon come to light. 

Now, China wouldn’t want a lot of that news circulating for everyone to dissect, no? The New York Times even has a special section for China’s property problems.

So, what else can the Chinese government crack down on? Forget domestic bloggers, even foreign news providers are China’s problem and it doesn’t want its citizens reading what the international media has to say.

Chinese police are using a new anti-fraud app installed on more than 200m mobile phones to identify and question people who have viewed overseas financial news sites, according to individuals summoned by the authorities.

[...]

A second user in eastern Shandong province said police called him on four consecutive days after the app showed he had visited what it labelled “highly dangerous” overseas information providers, including Bloomberg.

China’s holding all its cards to its chest.

Taxi driver tips and newspaper front page ads

You know the old lore about the correct time to exit the stock market being when your taxi driver starts giving you stock tips? 

JOE KENNEDY, a famous rich guy in his day, exited the stock market in timely fashion after a shoeshine boy gave him some stock tips. He figured that when the shoeshine boys have tips, the market is too popular for its own good, a theory also advanced by Bernard Baruch, another vested interest who described the scene before the big Crash:

"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."

If that’s the bottom-up signal for when a market is too hot, consider the front-page newspaper ad or the primetime TV celeb ad the top-down signals for the same.

Remember Indya.com? The web portal that was the first to buy out Times of India’s front page and use it to say, “India changes its name today”?

Indya.com "cornered every worthwhile Indian billboard, filled full-pages with smart advertisements and convinced The Times of India to forgo its 163-year editorial traditions and make its front page available for an Indya ad ~all part of a big-bang launch that cost a cool 4.5 crore." (that's Indian rupees, and a crore represents a unit of ten million)

Or Hometrade.com? The company that “burnt money to build a brand” by getting celebrities like cricketer Sachin Tendulkar and actors Shahrukh Khan and Hrithik Roshan to say “life means…more”?

These ads for a “play-to-earn” game appeared on the front pages of the Bengaluru edition of Times of India yesterday. 

You play a game. Involving “blockbots”. Which are also NFT tokens. And part of the exciting world of Blockchain gaming. 

If this doesn’t tell you we’re at peak crypto, I don’t know what will. 

That’s it for this week.

Don’t forget to write in with your thoughts and observations on the reshaping of businesses, societies, and economies. We will be back on Monday.

Stay safe,
Olina
olina@the-ken.com

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