New Delhi: Private insurance firms can sell shares to the public even before completing the mandatory 10 years of operations, provided regulatory guidelines are put in place first, said two senior finance ministry officials.
Good news: Sam Ghosh, CEO, Reliance Capital, said in May that the firm was looking to sell a 10-26% stake through an IPO or divestment.
The clarification may help smoothen the way for initial public offerings, or IPOs, by insurers such as Reliance Life Insurance Co. Ltd, a part of the Reliance-Anil Dhirubhai Ambani Group (R-Adag), that are seeking to raise capital.
Sam Ghosh, chief executive of Reliance Capital Ltd, which controls Reliance Life, said in May that the firm was considering selling a stake of 10-26% through an IPO or divestment to strategic investors.
But under present regulations, any Indian promoter holding a stake of more than 26% in an insurance venture can reduce its stake only after 10 years. Reliance Life came into existence only in 2003.
“We wrote to the finance ministry for approval of the IPO. We haven’t got any answer from them yet and any opinion has to come from the ministry only,” said Ghosh.
The Insurance Regulatory and Development Authority, or Irda, said in May that it is not empowered to approve the IPO before 10 years are completed. The issue was then raised with the finance ministry and later the law ministry for their opinion on whether a private insurance company can list before completing 10 years.
According to an interpretation of section 6AA of the Insurance Act, 1938, by the law ministry, one of the two finance ministry officials said, a company can sell shares in an IPO before 10 years if enabling guidelines are framed by the regulator.
“The law ministry has sent us their reply and we are taking a view on the subject,” said the official.
The second finance ministry official confirmed the law ministry’s opinion. Neither wanted to be identified because they aren’t allowed to speak with the media.
J. Hari Narayan, chairman of Irda, said, “We have not received anything from the government yet. We have to wait for their reply.”
Section 6AA of the Insurance Act stipulates that a promoter holding more than 26% in an insurance company will be required to divest its stake in a phased manner “after a period of 10 years from the date of the commencement of the said business by such Indian insurance company or as prescribed by the Central government”.
Last week Chanda Kochhar, managing director and chief executive of ICICI Bank Ltd, also said that the bank could opt for IPOs in four of its subsidiaries or sell a stake in its insurance ventures once the foreign direct investment limit in insurance is raised to 49% from the existing 26%.
India has 22 life insurance and 21 non-life insurance companies—all of them unlisted.
The life insurance industry registered a 10% fall in new premium income in the fiscal year ended 31 March compared with the preceding fiscal, led by a slump in demand for unit-linked insurance plans, a market-driven policy.
Life insurers collected a combined Rs44,688 crore in new premium income in the fiscal year. It was the first time since the insurance sector was opened up to private firms under a law passed in 1999 that the industry posted a decline.