IRDA plans to change lock in period for stake sale

Effectively managing capital and coping with long gestation period are two factors which determine which companies survive in the competitive insurance market. Earlier this year in June, Sunil Mittal decided to sell its 74% stake both in Bharti Axa Life Insurance and Bharti Axa General Insurance to Mukesh Ambani precisely for these reasons.

Acknowledging this, Insurance Regulatory and Development Authority (IRDA) already has Article 6AA of the insurance act in place. However some aspects of this act may soon change. Currently the guidelines says that promoters holding a 26% stake in life insurance companies needs to be locked in for a period of 10 years. But news is brewing that a new IRDA guideline would allow promoters to escape as early as 5 years. The new draft however does not apply to those promoters subscribing to IPOs of insurance companies. The draft guideline is expected in August and after public comments and recommendations, the final guideline is expected in October.

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IRDA's guidelines on IPO of Life Insurance companies.

The Insurance Regulatory and Development Authority (IRDA) has asked for feedback and recommendations on their newly proposed guideline formally called The IRDA (“Issues of Capital and Disclosure Requirements for Life Insurance Companies”) Regulations, 2011. The guideline maintains that the life insurance companies in India wishing to go public must have spent at least 10 years in the business and have must showed a satisfactory profit record in the past six quarters. In simple words it would consider only the frontrunners in this business. Currently only two insurance companies, viz. ICICI Prudential and HDFC Standard Life Insurance, meet the 10 year eligibility criteria. However if they wish to raise an IPO, they have to first get the approval nod from IRDA and only then can they approach SEBI. Apart from the tenure and profitability, the IRDA would also consider the company specific risk factors and the transparency of the company’s disclosures before they give the final nod.

In a way the new guideline provides security to the common man because it shall endorse only those companies who are serious in this business and have done well. While on one side it provides security, on the flip side it handicaps an important business aspect of the life insurance companies. The Section 6A of the Life Insurance Act allowed transfer of share below 5 % without the approval of any regulator. But if this new guideline comes into effect, it shall override this benefit for a period of 10 years. Keeping all other aspects aside this can prove to be a direct hit on the mergers and would lay the platform for a highly competitive life insurance business.