Proposed new insurance norms may adversely impact mergers (Lead)

July 3rd, 2011 - 4:24 pm ICT by IANS  

Chennai, July 3 (IANS) India’s insurance regulator may be attempting to override legal provisions while also seeking to prevent promoters from exiting ventures within 10 years of starting operations, experts feel.

Their cause of concern is the recent draft guidelines issued by the Insurance Regulatory and Development Authority — formally titled the IRDA (Issues of Capital and Disclosure Requirements for Life Insurance Companies) Regulations, 2011 (ICDR Regulations).

The proposed regulations are to govern the initial public offering by life insurers or for dilution of stake by the promoters. The insurance regulator has called for comments and views on the draft regulations before finalising the same.

“According to its apparent tenor, the proposed regulations would prevent promoters from exiting their venture or roping in new partners within 10 years of operations,” said D. Varadarajan, a Supreme Court lawyer specialising in company and insurance laws.

As per the draft regulations, promoters of life insurance companies can dilute or divest their holdings after 10 years of operations by:

- issuing capital under the ICDR regulations;

- divesting equity through ICDR regulations; and

- issuing capital or divesting through other means.

The catch lies in the fact that under the proposed norms, the 10-year operations clause may become mandatory for insurance companies proposing to raise capital through a public issue under ICDR norms, or if a promoter intends to reduce stake.

Experts maintain the Insurance Act does not bar insurers from going public within 10 years of operations.

“The condition that a promoter (or promoters) can divest their excess holding only on completion of 10 years from the date of commencement of operations by the insurer, goes against the provisions of the Insurance Act,” R. Ramakrishnan, a member of the Malhotra Committee on Insurance Reforms, said in an interview to IANS.

The Insurance Act has two sections on transfer of shares. Section 6A requires prior nod for transfer of stakes above five percent and Section 6AA deals with public issue or divestment by promoters after 10 years to bring down their holding to 26 percent.

“Section 6A of the act expressly provides for transfer of shares when the shareholding is below five percent, without the permission of the regulator. Any transfer in excess of five percent requires the regulator’s permission,” an insurance expert said.

But the draft regulations, if they come into force, may restrict any stake transfer during the first 10 years of operations.

“The ambit of Section 6A is entirely different. For all purposes, a lock-in period of 10 years as proposed by the insurance regulator as per norms can’t be stipulated here,” Varadarajan told IANS.

He further said Section 6AA comes into play only when insurance companies go for public issues or when promoters have to dilute their holdings after 10 years of operations.

Industry officials conceded as prudent the licensing regulation that bans promoters from transferring or diluting their stakes during first five years of operations to ensure that only serious players enter the business.

“Increasing the lock in period by another five more years is not only against the interests of the promoters but also the policyholders whom IRDA is seeking to protect,” S.B. Mathur, secretary general of Life Insurance Council of India, told IANS.

(Venkatachari Jagannathan can be contacted at v.jagannathan@ians.in)

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