)
The Insurance Regulatory and Development Authority (Irda) had in the recent past issued many enabling guidelines for insurers to invest in new categories, including infrastructure debt funds (IDFs), equity exchange traded funds (ETFs) and alternative investment funds (AIFs).
However, insurance companies say they will not rush to invest in these categories since the fund sizes are smaller than other investors while the risks are higher on these platforms.
Last week, the insurance regulator allowed insurers to invest in new instruments issued by domestic banks. These include debt capital instruments, redeemable non-cumulative preference shares and redeemable cumulative preference shares under Tier-II capital.
| NOT AN ASSURED SUCCESS... |
|
According to experts, this will help banks to augment additional capital, even though private insurers do not have very large investment capacities such as state-owned Life Insurance Corporation of India (LIC). “Although this option has been opened up for all insurers, we would primarily see LIC investing in these issues since it has large investable funds at its disposal,” said an investment official of a private life insurance company.
Irda had earlier allowed insurers to invest in banks’ perpetual debt instruments of Tier-I capital and debt capital instruments of upper Tier-II capital. In the wake of migration to Basel-III capital adequacy norms, banks need to raise additional capital. Globally, lenders have started augmenting capital by issuance of common equity Tier-I, additional Tier-I and Tier-II instruments.
The regulator has also allowed insurers to invest in category-II AIFs, including private equity funds, debt funds and funds of funds. While insurers agree this has resulted in more options, as category-I AIFs were restrictive, not many are looking at immediately investing in these categories.
Category-I AIFs include venture capital funds, small-and-medium enterprises (SME) funds, social venture funds, infrastructure funds and other specified AIFs. These funds are close-ended, don’t engage in leverage and follow the investment restrictions prescribed for each category.
The chief investment officer of a private life insurance firm explained that category-II funds such as private equity have a higher rate of return and higher risks. Hence, only large companies with higher risk appetite and confidence about the cash flow would go for these investments. He, however, added that Irda’s move had opened up a new segment for insurers, as globally, insurers did not have to follow any direction on their investments in different segments, as well as the quantum of the investments.
In such countries, insurers were expected to be prudent in investment decisions, while keeping in mind the nature of risks and rates of returns. Pradhan said returns from PE funds could be two per cent to 10 per cent higher than returns from the equity market.
Experts said for private equity funds, returns could be as high as 15 per cent, if the investment was for five-seven years. Currently, government bonds offer eight-to-nine per cent returns, while ‘AA’-rated bonds, on an average, offer 11 per cent.
IDFs are another avenue of investments allowed by Irda. However, insurers have made it clear that they will have only limited exposure to this segment initially, as this is a new instrument and the sector is illiquid. Investment officials also say not many companies have come up with issuances and the processes could take some time to start.
IDFs are investment vehicles that may be sponsored by commercial banks and non-banking financial companies (NBFCs) in India. Domestic or offshore institutional investors, insurance and pension funds can invest in these through units and bonds issued by these funds. Essentially, these will act as vehicles for refinancing existing debt of infrastructure companies, creating more room for banks to lend to new infrastructure projects.
Instead of newer segments, life insurance executives say that segments such as index-linked plans should be revisited. The chief investment officer of a large private life insurer said that index-linked products linked to a benchmark like the 10-year government bonds are easy to track and, hence, should be allowed in product structures. The new product guidelines for life insurers do not allow index-linked products.
