Reduce stake in insurance subsidiaries to 50% or below: RBI to HDFC

HDFC's share price were down almost 8 per cent to Rs 1,512

The Reserve Bank of India (RBI) has asked mortgage lender Housing Development Finance Corporation (HDFC) to pare stake in its insurance subsidiaries to 50 per cent or below. HDFC owns majority stake (more than 50 per cent) in both HDFC Life Insurance and HDFC Ergo General Insurance.
 

In a statement to the exchanges, HDFC said the RBI had directed that, after the merger of HDFC Ergo Health Insurance with HDFC Ergo General Insurance, it had to bring down its stake in the merged entity to 50 per cent or below within a period of six months from the date of the merger. It has to pare its stake in its life insurance subsidiary, HDFC Life, to 50 per cent or below on or before December 16.
 

“We presume the communication is in line with the RBI not wanting NBFCs to hold more than 50 per cent in insurance companies. Therefore, in HDFC Life, we have to pare 1.43 per cent, and in HDFC Ergo, we have to pare only 0.58 per cent,” said Keki Mistry, vice chairman and chief executive of HDFC.

“For HDFC life, we have six months to sell. For HDFC Ergo, we have time till six months after the approval of the merger between HDFC Ergo Health and HDFC Ergo, for which clearance is awaited from the National Company Law Tribunal. Hence we have sufficient time to sell,” he said.

According to RBI norms, the maximum equity contribution an NBFC can hold in the joint venture insurance company shall normally be 50 per cent of the paid-up capital of the insurance company. On a selective basis, the RBI may permit a higher equity contribution by a promoter NBFC initially, pending divestment of equity within the prescribed period.

While HDFC holds 51.43 per cent stake in HDFC Life, its joint venture partner in the company, Standard Life, holds 12.25 per cent. Foreign Institutional Investors hold 21.07 per cent, non-institutional investors have 9.15 per cent, and the mutual funds hold 4.45 per cent stake in the life insurance company. In the case of HDFC Ergo, the mortgage lender holds 50.48 per cent and the rest by foreign entities. But after the merger with HDFC Ergo Health Insurance, HDFC will hold 50.58 per cent in the merged entity.
 

HDFC’s share price tumbled almost 8 per cent to Rs 1,512 and HDFC Life was down 4 per cent to close at Rs 468 on the BSE.

There have been reports that the RBI is in favour of putting a cap on how much equity stake banks can own in insurance joint ventures at 30 per cent. Some banks have more than 50 per cent in their insurance joint ventures. State Bank of India holds 57.60 per cent in SBI Life and 70 per cent in SBI General. ICICI Bank has 52.87 per cent in ICICI Prudential Life Insurance and 55.86 per cent in ICICI Lombard General Insurance.
 

Recently, Axis Bank decided to increase its stake in Max Life Insurance by 29 per cent so that it can hold 30 per cent in the life insurance company, in line with the RBI’s suggestion for banks owing stake in insurance companies. Earlier, it held close to 2 per cent in the insurer. The bank will dilute 1 per cent stake in the insurer this year and then buy 29 per cent stake so that it doesn’t breach the 30 per cent threshold. According to insurance experts, this shows the RBI is looking to limit banks and non-banks ownership in insurance companies.

According to a report by CLSA, the impact is modest for HDFC Life, given HDFC Ltd’s stake is already at 51 per cent.

However, this could translate to $7.5 billion of life insurance and $2.5 billion of general insurance paper coming to the market, if the banks are required to reduce their stakes to 30 per cent given their current 55-100 per cent holding.
 

The holding companies/banks could benefit from increasing capital buffers by 120-330 bp for SBI and ICICI at a time when these banks may need to raise capital buffers.