Clearing the decks for Rs 3,000-crore Reliance Life-Nippon deal, the government today relaxed norms for dilution of stake by Indian promoters of insurance companies even before completion of 10 years of operations.
"Under Section 6AA of the Insurance Act, 1938, an Indian promoter can scale down the equity up to a level of 26% at any time after registration under the Act," a Finance Ministry circular said.
The Indian promoter would reduce its equity to a level of 26% after 10 years, if it is not done already, in a phased manner, for which rules are being issued separately, it said.
The limit for foreign direct investment will remain at 26%, it added.
The circular has removed the ambiguity of Section 6AA of the Insurance Act. The ambiguity came to light when Reliance Life announced its plans to go for a public offer in 2009, but could not obtain regulatory approval as it had not completed 10 years of operations.
The Section 6AA of the Insurance Act, 1938, stipulated that a promoter holding over 26% in an insurance company, including re-insurance, will be required to divest its stake and bring it below this threshold limit in a phased manner "after a period of 10 years from the date of the commencement of the said business by such Indian insurance company or as prescribed by the central government".
This provision does not apply to the foreign promoters of insurance firms, as per the explanation of the section.
The clarification on Section 6AA has come after consultation with the Ministry of Law and Justice and the Insurance and Regulatory Development Authority.
With the enabling provision, insurance firms can dilute their stake anytime before completion of 10 years of operation.
ADAG-promoted Reliance Life came into existence with the acquisition of AMP Sanmar in 2005. AMP Sanmar started operations in January, 2002, which implies Reliance Life would complete 10 years of operations in January next year.
In March this year, Japanese insurance firm Nippon Life Insurance Company agreed to acquire a 26% stake in Reliance Life Insurance for $680 million (about Rs 3,060 core), subject to regulatory approval.
The transaction pegs the total valuation of Reliance Life Insurance at about Rs 11,500 crore ($2.6 billion).
As per the current rules, a foreign entity can hold up to a 26% stake in an Indian insurance firm.
Nippon is the sixth-largest life insurer in the world and the No. 1 private life insurer in Asia and Japan.
