SBI Life Insurance Company Limited is tapping the capital markets with its offer for sale of 12 cr shares in a price band of Rs 685-700. The company has been promoted by State Bank of India and BNPCC the French company. State Bank of India would hold 62.1 % of SBI Life post issue and BNPCC 22%.

The Imperial Bank of India was nationalised on the 1st of July 1955 and the present State Bank of India was incorporated under the State Bank Act. The government of India owns 57.97% in State Bank of India as on 30th June 2017. The State Bank Act provides that the Government of India shall hold not less than 51% of State Bank’s shares. Additionally, as the promoter it has effective control over the affairs of the bank.

With this background, one finds it strange or a little odd that SBI Life Insurance Company Limited calls itself a private insurer. Even post the public issue SBI would still hold 62.1% of its shareholding. There was till 2000 just one insurance company in India i.e. LIC Of India and it is only in the period 2000-2001 that ten new insurers came. They were new generation players and many of them came with JV’s but did SBI Life become a private player just because it had a JV?

Coming to the company itself SBI sold 3.9% of the equity held by itself on 30th December 2016 to Temasek and KKR at a price of Rs 460 per share. Just about nne months later it is asking for a price of Rs 685-700 which is 50% higher. What has changed that there could be a 50% change in just nine months? Would the price then charged be a correct price and the current price therefore unreasonable? or was? Is the current valuation the correct price and therefore the price of December 2016 become a discounted price?

Let us look at the only comparable player who also happens to be listed and therefore becomes a fair comparison. ICICI Prudential shares closed for trading at Rs 423.65 on Friday. The embedded value as on 31st March 2017 is Rs 16,184 cr which with a market capitalisation of 60,809.13 crs translates into a valuation of 3.75 times to embedded value. Compare that with SBI Life which has an embedded value of 16,538 crs and a market capitalisation of Rs 68,500 -70,000 crs based on the price band. Considering the top end of the band the valuation would be 4.23 times. This therefore implies that the valuation is at a substantial premium to the listed player which has a track record of being listed for a year. Readers would also recall that the issue of ICICI Prudential took almost four months before the prices stabilised.

It therefore makes sense to buy ICICI Prudential currently and do a short trade for a fortnight till a day before the shares of SBI Life are to be listed. This would give an opportunity to ride the subscription and gain on the valuation difference currently available.

There is one other issue which needs to be highlighted. The reservation of shares for shareholders of State Bank of India. The company has decided to allot on a pro rata basis. This is against the spirit of being fair to the retail shareholder whose bid of one lot would now be compared with leveraged HNI who makes a single bid of the entire shareholders quota. Most unfair and thoughtless system. Just last year ICICI Prudential had done the same and realised the folly in doing so when the shareholders quota was subscribed 12.20 times and the overall issue subscribed 10.48 times. This time around they have changed the rules to allot one lot to all and then pro rata.

Same group of merchant bankers and refusal to learn from experience can only happen in a PSU company not a private company.