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Private Equity Funds Can Now Own Indian Insurance Firms, Says IRDAI

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In a move that could help enhance private equity investments in India’s insurance sector, IRDAI has permitted private equity firms to become promoters of unlisted insurance companies. The Insurance Regulatory and Development Authority of India notified the policy change via a circular issued on Dec. 5.

“This would bring in fresh perspective from a private equity promoter on how to take the insurance business to the next level,” Joydeep Roy, partner and leader of insurance and allied businesses at consulting firm PwC India told BloombergQuint. This is a welcome move as a private equity fund would have invested into understanding the insurance business as opposed to other investors, he said.

India’s insurance sector, that recently saw four large primary offerings, has drawn considerable investor interest. It accounted for just under 40 percent of the $1.5 billion invested by private equity investors in the financial services space in the July – September quarter, according to PwC’s MoneyTree India Report.

The same report listed two insurance deals, involving ICICI Lombard and Religare Health, amounting to a total $440 million or Rs 2,860 crore in the top 20 private equity investments made during the same period.

Total PE investments in listed insurance firms in India stand at nearly Rs 10,477 crore as of September 2017, according to their filings with exchanges.

What Prompted The Policy Change?

Two privately held insurance players – Star Health and Allied Insurance and Religare Health – had sent proposals to the regulator to sell a majority stake to PE firms, a senior official at the IRDAI told BloombergQuint in October. Prompting a change in policy.

So far, a PE fund could only purchase an up to 10 percent stake in an unlisted insurance company. The guidelines require all Indian investors, including PE funds, to jointly limit their shareholding to 25 percent or below, in an insurance company. The promoter or promoter group’s minimum shareholding should be maintained at 50 percent at all times.

The new guidelines permit PE funds to invest in insurance companies as promoters – that is, hold a 50 percent or more stake. But with a few caveats.

  • A PE fund looking to hold a promoter stake in an insurer cannot invest directly in an insurance company. The investment must be made through a special purpose vehicle. This SPV should be filed with and regulated by the Indian market regulator, Securities and Exchange Board of India.
  • A private equity investor cannot be a promoter of more than one life insurer, one general insurer, one health insurer and one reinsurer.
  • The investment should be made using the PE fund’s money and not borrowed funds.
  • The investor should make an undertaking to subscribe to rights issues so as to ensure the insurance company is not cash-strapped.
  • The investment will be subject to a 5-year lock-in period for any PE fund that holds more than a 10 percent stake in the SPV. Any divestment, including an initial public offer, post this lock-in period must seek IRDAI’s approval.
  • The PE investment shall be subject to compliance of “fit and proper” criteria as laid down in the IRDAI regulations
  • A new investor holding beyond 25 percent can only be introduced in the SPV after prior approval from the insurance regulator.

The guidelines restrict promoters from creating any encumbrance or leverage on the investment.

One expert thought that was counterproductive

“This may deter PE funds to invest in Indian insurers as they generally buy stake through leverage, but because of this clause, that may no longer be possible,” said Nidhesh Jain, head-insurance at financial services company Investec.

For insurance companies with PE funds as promoters, either the chairman of the board should be an independent director or the chief executive officer or managing director of the company should be a professional and not nominated by the promoter. Independent directors must constitute one-third of the board. Besides, the Indian insurance company must comply with IRDAI’s guidelines on being “Indian owned and controlled’.

The regulator’s move to lay down uniform norms stems from a decision by brothers Malvinder and Shivinder Singh to sell an 80 percent stake in Religare Health Insurance Ltd. to a consortium of investors led by a private equity firm True North for Rs 1,300 crore. The deal, announced in April, awaits IRDAI’s approval.

“We are comfortable with the five-year lock in period as our funds normally have a life of 12+2 years, so there is no shortage of tenure for us,” Divya Sehgal, partner at the PE firm True North told BloombergQuint when asked about the new guidelines.

“Prima facie, the guidelines do not seem to have much of an impact on the deal as no investment cap has been introduced for PE funds looking to become promoters in insurance companies. If majority of the investors are of Indian origin, such a deal is likely to get an approval,”said Jain.

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