LIC IPO: Irdai raises investment limit for insurers in BFSI sector to 30%

This could free up more funds to invest in the largest IPO, say industry insiders

The Insurance Regulatory and Development Authority of India (Irdai) on Friday raised the investment ceiling for insurance companies in the banking, financial services, and insurance (BFSI) sector to 30 per cent from 25 per cent of their investment corpus. The move also comes ahead of the Rs 21,000-crore initial public offering (IPO) of Life Insurance Corporation of India (LIC).

The move paves the way for further investment by insurers in the BFSI space. Industry players said the existing sectoral investment cap of 25 per cent has been fully utilised by most insurance firms. Some large private sector insurers plan to subscribe to LIC shares in the anchor category, said sources.

In a statement, Irdai said, “The authority in exercise of its powers conferred under Regulation 14(2) of the Irdai (Investment) Regulations, 2016, permits all Insurers to have exposure to financial and insurance activities up to 30 per cent of investment assets.”

Accordingly, the limit of 25 per cent of investment assets stands revised to a limit of 30 per cent investment assets, the regulator said.

This has been a long-pending demand of the sector as most firms operated perilously close to the ceiling prescribed by the regulator.

The sectoral cap was too restrictive, particularly when it comes to the financial sector, as it accounts for over a third of the country’s total market capitalisation. As a result, most insurance companies are underinvested in the financial sector.

“We currently have about 23 per cent exposure to BFSI versus the erstwhile cap of 25 per cent. This is to leverage any opportunity that may come up from time to time. With the limit expansion, we do expect our exposure to BFSI to increase,” said Rushabh Gandhi, deputy chief executive officer, IndiaFirst Life Insurance.

“Till now, because of regulatory considerations, BFSI exposure was restricted to 25 per cent for insurance companies. However, the BFSI weighting in key indices such as Nifty is at 35 per cent. Thus, the cap of 25 per cent was restrictive. The relaxation of the cap to 30 per cent by Irdai will facilitate insurance companies to take a higher exposure in the BFSI sector,” Gandhi said.

In the Nifty 500 index, banks, non-banking financial companies, and insurance companies have a combined weighting of 28.5 per cent. This has reduced sharply from the peak due to the recent underperformance of the banking and financial stocks.

Nilesh Sathe, former Irdai member, said, “There was a demand from insurance companies to increase the exposure limit under BFSI which was at 25 per cent. They were finding it difficult to invest in the BFSI sector because of the ceiling. The weighting given by Nifty or Sensex to the BFSI sector is also higher than what was prescribed by the Irdai and, hence, it appears that Irdai has now decided to increase the limit”.

Without increasing the sectoral cap, insurance companies would have had to divest their existing financial sector holdings to apply in the LIC IPO. Irdai’s move could increase insurers’ participation in the country’s largest maiden offering.

“The timing of the change may be viewed in the context of the upcoming LIP IPO, but it also reflects the regulator’s confidence in both the investment capacity of Indian insurers and the strength of the financial sector in India,” said Rohit Ambast, partner, IndusLaw.

The financial sector investment pie has been consistently growing with new listings of companies in the mutual fund, small finance bank, and NBFC space.

Mihir Vora, senior director & chief investment officer, Max Life Insurance, said, “It gives more flexibility to the insurance companies to invest, allowing them to diversify their exposures further. The limit is across equities and fixed income exposures. The overall importance of the financial sector has been increasing as banks and finance companies have grown significantly in size, and newer financial segments like insurance, asset management, broking, wealth management, fintech have also achieved significant size in the equities and fixed income markets”.