Edelweiss withdraws from LIC pre-IPO advisor selection over concerns of conflict of interest – Moneycontrol

Ashwin Mohan & Gaurav Choudhury

Edelweiss Financial Services has withdrawn from a government process to select two pre-IPO transaction advisors for the mega Life Insurance Corporation initial public offering (IPO) after concerns were raised over the possible conflict of interest, people with knowledge of the matter told Moneycontrol.

“Edelweiss has written to the government and voluntarily opted out of the process following concerns raised by the government on a potential conflict of interest scenario due to the firm’s existing life insurance joint venture with Tokio Marine,” said an individual cited above.

The proposed listing by LIC, which dominates India’s insurance sector, is expected to be the biggest in the history of the Indian capital markets. LIC, in which the government owns 95 percent, is India’s oldest and biggest insurer with total assets in excess of Rs 31 lakh crore.

On July 28, 2020, Moneycontrol reported Deloitte and  Edelweiss Financial Services Ltd had been shortlisted by the government following technical and financial bids submitted by investment banks and advisory firms. The process to select the pre-IPO advisors was launched by the Department of Investment & Public Asset Management (DIPAM) under the finance ministry.

Established in 2011, Edelweiss Tokio Life Insurance Co is a joint venture between Edelweiss Financial Services and Tokio Marine, one of Japan’s oldest and largest insurance companies.  The joint venture runs 121 branches across 91 cities, according to its website.

“The entity where the merchant banking business rests (Edelweiss Financial Services Ltd) is also the entity that owns a stake in the life insurance business, which has caused a certain degree of discomfort,” added a second person. “So in the larger interest, they pulled out.”

Another person familiar with the matter said after the withdrawal of Edelweiss, other players left in the process are Deloitte, Citi, Credit Suisse and SBI Capital. “The government will assess the situation and take a call on the way forward,” this person said.

All three persons spoke to Moneycontrol on the condition of anonymity.

Edelweiss Financial Services declined to comment in response to a detailed email query from Moneycontrol. Moneycontrol is awaiting a response to an email query sent to DIPAM. A text message sent to a senior DIPAM official was left unanswered. Deloitte, Citi, Credit Suisse and SBI Capital couldn’t be immediately contacted. In terms of recent government mandates, Edelweiss managed the Bharat Bond ETF and is working as one of the merchant bankers on the Mazagaon Docks IPO.

Rule of the Game

Based on the terms and conditions in the request for proposal (RFP) floated earlier by the government,  it reserves the right to select only one transaction advisor. “However, if two pre-IPO transaction advisors are selected and the second transaction advisor selected on this basis has quoted a lower fee than that quoted by H1, such transaction advisor will get a fee equal to the fee quoted by him divided by two,” the RFP says.

In case an investment bank is selected as transaction advisor for the pre-IPO stage, the same would not be a limitation on being appointed as BRLM book running lead manager) for the IPO, it adds.

Bids are evaluated on the weightage of marks.  Marks scored by the shortlisted bidders in the technical evaluation and financial bids are given a weightage of 80 and 20, respectively. “The combined score of technical and financial bids on Quality cum-Cost Based (QCCB) System determines the H1, H2, H3, and so on,” the RFP says.

To qualify as an advisor for the pre-IPO deal, a bidder should have an experience of handling at least one IPO of a minimum size of Rs 5,000 crore between April 1, 2017, and March 31, 2020, or should have managed a capital market transaction of Rs 15,000 crore or more during this period.

Edelweiss had worked earlier on the ICICI Lombard IPO in September 2017 and the HDFC Life IPO in November 2017.

The definition of conflict of interest

The government RFP elaborates on the definition of “conflict of interest” using five illustrations, including a situation in which the advisor by itself and/or in association with another entity is engaged in an activity or business or transaction that would affect the interest of the government or LIC.

The scope of the LIC PRE-IPO mandate includes advising the government on the modalities of the IPO and the timing, arriving at an optimal capital structure, preparing restated consolidated financial statements for the past three years for LIC and its subsidiaries and structuring the transaction, among other aspects.

The government’s intent to launch the LIC IPO was announced by finance minister Nirmala Sitharaman in the Union Budget speech for 2020-21.

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