Promoters can divest excess equity through offer for sale

Insurance regulator, IRDA, has come out with draft regulations for general insurance companies to raise capital through public issue of shares.

Once firmed up, the norms could pave the way for the Union Government to shed stake in state-owned general insurers.

Excess shareholding

The draft regulations provide for promoters of general insurance companies to divest their “excess shareholding” in such companies through a public offer for sale.

Excess shareholding refers to the shareholding over and above the limits of shareholding prescribed under Section 6AA of the Insurance Act.

This provision, as it stands today, requires promoters holding over 26 per cent to shed their excess stake in a phased manner after a period of 10 years from the date of commencement of business.

The draft regulations stipulate that a company can come out with a public issue only on completion of 10 years from the date of commencement of business, or such other period as may be specified by the Central Government.

The Insurance Regulatory and Development Authority (IRDA) has also stipulated that no general insurer should approach the Securities and Exchange Board of India for public issue of shares and for any subsequent issue without the “specific previous written approval of the IRDA”.

Also, the insurance regulator has stipulated that no allotment of capital by an insurance company can be in any form other than as fully-paid equity shares.

Any approval granted by IRDA for capital raising will have a validity period of one year from the date of issue of approval letter, the draft regulations has said.

Within this one-year window, the applicant company will have to file the draft red herring prospectus with SEBI under the ICDR regulations.

Criteria for approval

As for the criteria for consideration for approval, IRDA will consider the applicant company’s overall financial position; it’s regulatory record; the proposal for issue/offer of capital; the capital structure post issue/offer of capital; and the purposes to which the share capital proposed to be raised will be applied.

In particular, IRDA will consider parameters such as embedded value, maintenance of regulatory solvency margin, record of policyholder protection, compliance with the corporate governance guidelines and history of compliance with the regulatory requirements.

IRDA also seeks to empower itself to prescribe the extent to which the promoters should dilute their respective shareholding, the maximum subscription which could be allotted to any class of foreign investors and also the minimum lock-in period for the promoters from the date of allotment of shares.

Application format

The insurance regulator has also prescribed the application format for the Authority’s approval for issue of capital under the SEBI’s capital raising regulations, known as ICDR regulations.

SEBI has laid down the framework for issue of capital and disclosure requirements in the SEBI (Issue of Capital and Disclosure Requirements), Regulations 2009.

IRDA had last year come out with guidelines for life insurance companies to tap the capital market.

(This article was published on September 19, 2012)
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