Private life insurers planning maiden issues can submit their proposals from Friday. However, the Life Insurance Corporation of India, the country’s largest insurer set up under an Act of 1956, will have to wait till Parliament ratifies the Life Insurance Corporation (Amendment) Bill.
According to the IRDA notification on regulations governing the issue of capital by life insurers, only those having a track record of 10 years can go for an initial public offering but before that they will have to seek approvals from two regulators — the insurance regulator and then Sebi.
Only after obtaining a written approval from the IRDA can an insurer file its initial public offer document with the Securities and Exchange Board of India (Sebi).
On its part, the Insurance Regulatory and Development Authority will first evaluate the applicants on certain parameters such as the period for which it has been in business, the company’s history of compliance with regulatory requirements and corporate governance, solvency margin and financial strength.
Besides a 10-year business history, the IPO aspirant should have an embedded value twice its paid-up equity capital, including the share premium. Embedded value is measured by the present value of the company’s future profits plus adjusted net asset value.
Though the IRDA regulations have not specified a uniform threshold below which domestic promoters of an insurer cannot dilute its stake, the regulator retained its discretionary powers to decide which promoters can dilute how much of their shareholding.
At present, foreign direct investment is allowed up to 26 per cent in a life insurance company. A domestic promoter thus can hold up to 74 per cent stake in a life insurance venture. To prevent any such situation from arising wherein such a domestic promoter can dilute its stake below 51 per cent, the insurance regulator has made its approval for an IPO application conditional.
“While granting its approval, the authority may prescribe the extent to which the promoters shall dilute their respective shareholding, the maximum subscription which could be allotted to any class of foreign investors, and the minimum lock-in period for the promoters from the date of allotment of shares,” the regulations said.
In its draft regulations for IPOs for life insurance companies in June, the IRDA had spelt out the way companies should compute future profits from the current block of assets, or the embedded value, which would set the benchmark for share pricing.
All insurance companies will have to follow a uniform formula set by the Institute of Actuaries of India for embedded value calculation.
Under the regulations as notified today, all life insurance companies planning an IPO will have to prepare an embedded value report by an independent actuarial expert and that report has to be reviewed by another independent actuary.
The rules specify that the insurer should disclose the embedded value on the valuation date and also one year before the valuation date. This, IRDA officials said, would help investors compare the change in the embedded value.
Though a number of private life insurance companies have evinced interest in coming out with their maiden IPOs, they may not be in a hurry to do so now.
At the company’s annual general meeting this year, HDFC chairman Deepak Parekh had said, “We are planning to come up with an IPO for insurance in two years.”
A recent research report by HSBC noted that “only a brave Indian insurer” will come out with an IPO now, given the impact of the new regulations on unit-linked insurance plans (Ulips) and the pending direct tax code (DTC) bill.
“Besides declining sales, new business margins are also under pressure given the burden of fee and surrender penalty caps in Ulips,” the report said.
