Mumbai: India’s insurance regulator has released the long-anticipated norms that will govern initial public offerings (IPOs) by life insurance companies in a bid to help them raise capital from the public.
Given the market uncertainty, however, there isn’t likely to be a rush to sell shares, analysts said.
The rules issued by the Insurance Regulatory and Development Authority (Irda) on Thursday stipulate that only those life insurers that have completed 10 years of operations will be allowed to float IPOs. A senior Irda official clarified that in addition to this, a company needs to have embedded value twice the paid-up equity capital.
Embedded value, or EV, is the future value of the current business of a company based on present assets and liabilities, and net value of future income flows.
“Most of the companies eligible for an IPO would have an EV twice their paid-up equity capital, but if the direct taxes code (DTC) is continued with, the EV will erode by 15-20%,” said Amitabh Chaudhary, chief executive officer of HDFC Standard Life Insurance Co. Ltd. “We are awaiting clarity on DTC.”
Insurance companies contend that the tax outgo will increase under the proposed DTC.
There are 24 life insurance companies in India with total assets worth at least Rs13 trillion. Life insurers, including ICICI Prudential Life Insurance Co. Ltd, SBI Life Insurance Co. Ltd, HDFC Standard Life Insurance Co. Ltd and Reliance Life Insurance Co. Ltd, have evinced interest in tapping the public markets to raise capital. However, none of them has finalized their plans. Adverse capital market conditions, recent regulatory changes for unit-linked insurance plans and consolidation have compelled the companies to review listing plans.
The broader equity indices have fallen 20% so far this year.
“Though the guidelines seem to be fine, IPOs will not happen unless the equity markets improve and the industry finds a sustainable model for improved margins,” said the chief executive of a leading life insurance company. He declined to be named as he’s not authorized to talk to the media directly.
The guidelines provide detailed norms on disclosures to be made by life insurers wanting to raise capital from the public. The rules further require issuer companies to get their EV reviewed by two independent actuarial experts, apart from internal valuation exercises.
While floating public issues, Irda will hold the right to dictate the extent of dilution of stake by promoters, the maximum subscription that can be allotted to foreign investors and the minimum lock-in period for promoters after the issue. The current rules allow a maximum of 26% to be held by foreign investors.
“Even if the foreign partner of a JV (joint venture) life insurer is not a selling shareholder in an IPO, the fresh issuance of shares will bring down the foreign promoter’s stake and a new (overseas) investor can come in, in accordance with the present cap of 26%,” the Irda official said. According to the official, the regulator will soon release detailed disclosure requirements.
No life insurer can approach market regulator Securities and Exchange Board of India (Sebi) for IPO approval without going to Irda first, the guidelines say.
Irda’s approval for an IPO will only be valid for a year, within which the company can approach Sebi. This is in line with listing norms laid down by Sebi for companies wanting to raise capital through public markets.
Companies going public have to mandatorily disclose a record of policyholder protection and the pendency of the policyholder complaints for the last five years in the draft red herring prospectus to be filed with Sebi.