The Securities and Exchange Board of India (Sebi) has withdrawn a major irritant for life insurance companies wanting to hit the capital market with initial public offers. While clearing IPO guidelines of life insurance companies, the regulator has removed the three-year profitability clause that is applicable for all companies as a precondition for tapping the capital markets.
However, insurance companies will have to go for additional disclosures as required by the Insurance Regulatory Development Authority (Irda) over and above the disclosure norms set by Sebi. “Sebi has cleared the draft guidelines on IPOs. We are in the process of gazetting it; it should be out by the end of this month,” said R K Nair, ED, investments, Irda.
The move to remove the three-year profitability clause is expected to bring some relief to the majority of life insurance companies, as most of them are yet to underwrite any profits, say industry experts.
Also, keeping the upcoming IPO guidelines in mind, most of the private life insurance payers over the past one year have stopped expanding their network and even brought down their workforce. “All these measures helped some of them to reduce costs and even report profits. Though big life insurance companies have started showing profits, very few of them have managed to report it continuously for three years. Hence, the move to remove the three-year profitability clause will be a relief for many players,” said a senior official at a private life insurance company.
According to the draft guidelines, insurance companies, which have completed 10 years of operations, will be allowed to tap the capital market and the valuation should be based on the embedded value to be calculated by a method designed by the Institute of Actuaries of India.
“The process of calculating the embedded value has to be standardised and the Institute of Actuaries of India is set to come out with that. It is very important for investors to get an idea of the market value of the company,” Nair said.
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Insurers planning IPOs will have to disclose their economic capital as well as the embedded value to the regulator, he added.
They have to first seek formal approval from the insurance regulator and then the final approval from Sebi. Typically, under the disclosure norms, insurance companies will have to disclose their balance sheet, premiums, commission expenses and operating expenses on a quarterly basis.
This apart, the guidelines are expected to follow the usual norms, like individuals holding more than 10 per cent stake would be considered as promoters and the company will have to maintain a solvency ratio of 1.5.
Significantly, Irda will not have any mandate on the extent of dilution, and it is up to individual companies to decide on the size of the issue. “The guidelines will give the process of getting listed. It is up to individual companies to decide on the extent of dilution and the size of the issue,” Nair said.
Sebi guidelines mandate 25 per cent of the shares of a listed company be retained by the public.
The IPO guidelines are considered important as a host of private life insurance companies, such as Reliance Life, HDFC Life and ICICI Prudential Life have expressed interest in tapping the capital market.