Mumbai/New Delhi: India’s Insurance Regulatory and Development Authority (Irda) will soon allow promoters of life insurance firms, holding at least 26% stake, to sell strategic stake after five years of obtaining a licence, instead of the present holding period of 10 years.
The authority will allow the new buyers to divest only after five years, said three persons directly involved in the process.
The modified norms, likely to be announced in August, may also clarify that a five-year lock-in period for those subscribing to initial public offerings (IPOs) of insurers does not apply, the persons said.
“We will come up with the draft guidelines explaining our stance on section 6AA (that deals with stake sale of promoters with 26% stake or more) of the Insurance Act in August, seeking public comments and final guidelines will be formulated by October,” an Irda official said on condition of anonymity because he is not authorized to speak with the media. The matter has been under Irda consideration for quite sometime now.
“I would like to comment only after the guidelines are made public,” chairman J. Hari Narayan said over the phone from Hyderabad on Saturday.
At least two proposals of stake sale by promoters have been hanging fire—Reliance Life Insurance Co. Ltd’s 26% stake sale to Nippon Life Insurance Co. and Bharti’s 74% stake sale in Bharti AXA Life Insurance Co. Ltd. Both are waiting for regulatory clearance.
Reliance Life’s proposal has not been cleared yet since the company will complete 10 years of operations only in January 2012.
If Irda goes ahead with the proposed rider of five-year lock-in for new buyers, Nippon, which bought a 26% stake in Reliance Life in March, will not be able to divest early even if it wishes to.
The Japanese insurance company will have to stay invested for the next five years.
“There was a need to ensure that the promoters are committed as insurance is a long-term business,” said the Irda official quoted earlier.
In June, the Mittal family, which owns a controlling stake in Bharti Airtel Ltd, India’s largest mobile telephony company by subscribers, said it proposes to sell its entire 74% stake in both Bharti AXA Life Insurance and Bharti AXA General Insurance Co. Ltd to Mukesh Ambani, chairman of Reliance Industries Ltd.
The Life Insurance Council, a national industry body, had earlier written to Irda asking it to include the 10-year clause only when the promoters are bringing down their stakes through retail IPOs.
“It should not be applicable in cases where promoters reduce their stake through private placements or private equity sales or where promoters change hands,” Life Insurance Council secretary general S.B. Mathur said.
Irda had approved the entire stake sale by promoters of AMP Sanmar Life Insurance to Anil Ambani-promoted Reliance Life Insurance in 2005, but it was an exception.
Insurance, being a long-gestation business, requires stronger commitment from its promoters, but a few entered the business with expectations of making windfall gains fast, said a Bharti AXA official, who requested to remain unnamed.
“New players need their promoters to put in capital so that they can build up scale,” said Mathur. Many promoters entered the insurance business when their core businesses were booming, he added.
“They are struggling to put in capital into the insurance business and they cannot exit because of Irda rules, Mathur said. “If newer players cannot build up scale, they will not get new policyholders and existing policyholders will suffer.”
There are 23 life insurance companies in the country, including the public sector Life Insurance Corp. of India, in the Rs14.7 trillion industry.
Life insurance premiums are just 6.6% of India’s gross domestic product, according to a September 2010 report by consultancy firm Ernst and Young.