IRDA News: Patchy cover

With the draft guidelines on general insurance companies raising capital from the public being issued by the Insurance Regulatory and Development Authority (IRDA), the process of shoring up the capital base of the country’s insurance industry has moved a step forward.

This follows the regulator notifying similar rules, last November, for life insurers to tap the capital markets via the IPO or public offer-for-sale route. The insurance industry today needs large sums of money – projected at over Rs 60,000 crore in the next years by IRDA. Given the Government’s inability to push through legislation allowing the foreign direct investment (FDI) limit in the sector to be raised from the current 26 to 49 per cent, and most domestic majority partners in existing joint ventures being in no position to invest fresh equity, the newly drawn regulations would offer an alternative avenue for capital infusion.

But the current state of the markets does not still make public floatations a viable option. Out of the 23 life insurers, all – barring the state-owned Life Insurance Corporation (LIC) – have accumulated losses, with only a few just beginning to report profits. It is worse in non-life, with all but two recording losses. That is unlikely to generate much investor appetite for insurance IPOs. On the contrary, the domestic promoters of existing ventures would any day prefer to dilute their stakes in favour of their foreign partners. The latter, given their deeper pockets and long-term interest in the Indian market, are likely to deliver better valuations than any public offer-for-sale issue.

The latest IRDA guidelines are, at best, a poor substitute for FDI, which is a ready source of capital for a sector that desperately needs it at this stage. Without fresh capital infusion, this industry – which is also a source for channelising long-term funds into infrastructural investments in the economy – cannot simply grow. And that’s not good for a country, where four-fifths of the population is without any life insurance cover; in contrast, mobile telephone penetration has reached 90 per cent only due to unbridled private sector competition.

The public issue option may, in fact, be more relevant in respect of LIC and the state-owned non-life insurers. Considering that the Government’s stakes in state-owned banks has come down significantly without causing any major dilution in their basic ‘public sector’ character, there is no reason to look at public sector insurance companies in any different light.

An offer-for-sale by the Government is the best way to have these companies listed, which would also yield it much-needed disinvestment revenues. In the case of LIC, that would, no doubt, require an amendment of the law constituting it. It would, indeed, be a true test of the Government’s reformist credentials, if it can follow through with such a legislative intent.

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