Irdai asks insurers to sell their holdings in Tata Sons promptly

The insurance regulator has asked insurers to sell their holdings in Tata Sons promptly. The instruction could take out more than Rs 80 billion of investments made by these companies in the holding company of India’s largest business group.

The Insurance Regulatory and Development Authority of India’s (Irdai’s) instruction is based on a reading of the Insurance Act of 1938. The Act forbids insurance companies from having stake in unlisted companies.

While Tata Sons had switched its status from a public limited company to a private entity last year in the wake of the spat in the group between Ratan Tata and Cyrus Mistry, there was no communication from Irdai to the companies since then. Life Insurance Corporation had flagged the issue in January this year. But no formal advice had been issued. Given the sensitivity of the issue, Irdai had kept its decision in abeyance till new chairman SC Khuntia took over in May. The board of the regulator examined the issue in August and has now come up with its formal position.

A Tata Sons spokesperson did not respond to calls. The regulator has also rejected an alternative proposal made by the companies to allow them to hold debentures of Tata Sons till maturity. 

“(The) Authority (Irdai) has pointed out that in terms of the Insurance Act as well as IRDAI Investment Regulations 2016, investments in private limited companies (are) not permitted. (The) Authority has directed insurers to comply with the requirement of Insurance Act and associated Investment Regulations,” an identical mail sent out to both the Life Insurance Council and the General Insurance Council, by Irdai notes.

The communication from the regulator could put insurance companies in a tough spot in a year when their investment income has come under pressure. The companies are also buffeted by a series of regulatory changes, impacting income from their policies. A representation made by them notes: “In the event these investments are offloaded owing to the above law – policy holders at large would suffer a loss as interest rates have gone up and consequently the bond prices have moved southwards and further it would disturb the Asset Liability Management of the insurance companies”. The estimated loss to the insurance companies, they have noted, could be about Rs 800 million. The companies had urged Irdai to allow them to grandfather their investments since the “Tatas are one of the most respected companies in India”. The development is bad news for Tata Sons also. When LIC had made a pitch with Irdai, Tata Sons is understood to have interceded too. A Business Standard report had noted that LIC was the biggest investor in Tata Sons’ debt (non-convertible debentures, or NCDs). As of March 2017, of the NCDs outstanding worth Rs 210 billion of Tata Sons, the insurance sector accounted for a third. Tata Sons is understood to have also communicated to Irdai to not press the companies to reduce their exposure. 

Tata Sons is in the midst of expanding its investment in several companies of the group. The additional capital is meant help the companies capitalise on growth possibilities. The group companies are in the middle of expansion in several sectors, picking up stake in the manner Tata Steel did in Bhushan Steel. The holding company has generated about Rs 270 billion from two share buybacks done by Tata Consultancy Services to finance some of these quests.