MUMBAI: The insurance regulator aims to control transfer and dilution of ownership in insurance companies similar to what the Reserve Bank of India (RBI) does with banks, to prevent financial investors from flipping investments for short-term gains that may hurt long-term prospects.
The Insurance Regulatory and Development Authority (Irda) has proposed a series of measures including mandatory prior approval for anyone to raise stake beyond 5%, and anyone keen to buy 1% or more should seek regulatory approval. "Any change in the structure of shareholding pattern of an insurance company should have explicit approval of the regulator,'' Irda said in a draft guideline, a copy of which is with ET.
Irda's attempts to tighten transfers among shareholders and fresh equity investments come ahead of announcing new rules for initial public offerings (IPOs) by insurers. There is a potential for private equity firms or other institutional investors buying stakes in such insurance companies at inflated valuations just before the IPO and the possibility of their selling them once the stock is listed. Also, private funds are known for engineering financial ratios to present a rosy picture. "The regulator wants to ensure that no individual investor or institution should call the shots,'' said Life Insurance Council secretary general SB Mathur, a former chairman at LIC.
"The idea behind coming out with these guidelines is that companies should be run in a more professional way." Irda appears to be walking the path laid down by RBI for holdings in banks which it strictly monitors. In transactions such as HSBC buying a substantial stake in UTI Bank (now Axis Bank), and Standard Chartered and an associate fund's holdings in Tamilnad Mercantile Bank, the central bank ordered a cut in holdings. Irda's proposal includes that in case of a bank or an investment firm, regulatory approval would be required if their stake exceeds 2.5% in an insurance company.
The new rules are also triggered by the changing shareholding pattern in Metlife India where the once minority investor - IGE Private Equity - got a controlling stake after one of the founders Jammu & Kashmir Bank lost ownership when it could not invest along with other holders to expand business. "We want beneficial owners to promote the company,'' said an Irda official who declined to be named. "In some companies proxy investors are getting the control.'' Metlife's shareholding changed from the time it started operation.
Promoters like Metlife had 26%, J&K Bank 25%, Shapoorji Pallonji 24%, IGE had 19% and SHPL had the remaining 6% stake in the company. With the subsequent capital infusion, the shareholding pattern has changed. IGE's stake rose to 33% while J&K Bank's fell to 12%.
Under Section 6A of the Insurance Act, insurance companies transfer shares to other insurers which is subject to regulatory approval. In a draft guideline, Irda said that any proposal to transfer shares would not be limited to minimum lock-in period, additional capital brought in the company and compliance with all regulatory stipulations . Irda will carry out proper due-diligence of the proposed shareholder who would like to transfer before allowing it.
Irda tightens stake transfer, dilution of ownership in insur
CA ADITYA SHARMA (CA IN PRACTICE ) (16719 Points)
04 August 2011
CAclubindia
