Experts demand rules for stake dilution in insurance firms

December 5th, 2011 - 8:22 pm ICT by IANS  

Chennai, Dec 5 (IANS) The government should come out with rules such as setting a time frame for dilution of excess stake held by promoters of life insurance companies as many of these firms are about to complete 10 years in business, say experts.
Holding of over 26 percent of the equity after 10 years of operations is termed as excess shareholding.

The sectoral regulator, the Insurance Regulatory and Development Authority (IRDA), Dec 1 announced the “Issuance of Capital by Life Insurance Companies Regulations, 2011″, governing the dilution of excess shareholding by Indian promoters of life insurance companies under Section 6AA of the Insurance Act, 1938.

The regulations provide for the manner in which promoters can dilute their excess stake-public issue, private placement and others but does not provide for the time frame by which promoters have to bring down their holdings to 26 percent.

At present, a foreign partner’s holding in an insurance company is capped at 26 percent. The insurance sector was opened up in 2000.

According to legal experts, the IRDA has come out with the regulations that prescribe the “manner and procedure” by which promoters of life insurance companies can divest their excess shareholding.

“Now it is imperative for the central government to come out with rules as early as possible as many insurance companies are at the threshold of 10 years of existence, both in life and non-life sectors,” D. Varadarajan, a Supreme Court lawyer who specialises in company and insurance laws, told IANS.

“There should not be a regulatory vacuum in this regard,” he added.

Meanwhile, speaking about IRDA’s recent regulations, secretary general of Life Insurance Council S.B.Mathur told IANS: “It is largely on expected lines and we do not have any issues on that.”

A senior official of a private life insurance company, preferring anonymity, said: “The Insurance Act or the IRDA regulations do not prescribe any condition that companies should list their shares. The companies are free to decide on the manner of stake dilution. The promoters can bring in additional major shareholders.”

He said the stake dilution can happen by any one of the following means — public issue of capital, divestment of promoter equity through public offer for sale and private placement, including transfer of shares.

Citing the weak share market sentiments, life insurance officials say companies may not come out with any public issue now, but may do so in 2013.

“This not the right time for any company to come out with a public issue,” Mathur said.

“Our new business is down as compared to the previous year. Further, the share market is also down. The valuations will not be great for the promoters to dilute their stakes now,” an official of a private life insurer told IANS.

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