EXPANDING CAPITAL ACCESS. IRDAI allows foreign investors in capital raising

In a major boost to insurance sector, the insurance regulator IRDAI has allowed foreign investors, including FPIs, to invest in preference shares and subordinated debt issued by Indian insurers, expanding their pools of capital to fund their business growth in the world’s fastest growing large economy.

The regulator has also now allowed the subordinated debt issued by the Indian insurers to be listed in local stock exchanges (no overseas listing allowed). 

In a new set of regulations around ‘other forms of capital’ now issued by IRDAI, the regulator has stipulated that the quantum of investments by foreign investors including FII/ foreign portfolio investors (FPIs) in these two instruments — preference shares and subordinated debt— cannot exceed the sectoral cap (specified under FEMA).

OVERALL LIMIT

IRDAI has stipulated that the total quantum of the instruments under ‘other forms of capital’ taken together should be lower (at any point in time) of (i) 50 per cent of the total paid-up equity share capital and securities premium of an insurer or (ii) 50 per cent of networth of the insurer. 

Also, IRDAI has stipulated that the issue of subordinated debt would either have to be perpetual, or the maturity/redemption period should not be less than ten years for life insurance companies, general insurance companies and reinsurance insurance companies. The maturity/redemption period should not be less than seven years for health insurance companies.

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Insurers have not been permitted to issue either preference shares or subordinated debt with “put option”.  However, an insurer may issue instruments with a “call option” subject to certain conditions being met.

WHAT IS SUBORDINATED DEBT?

Put simply, subordinated debt (debenture) is an unsecured loan or bond that ranks below other, more senior loans or securities with respect to claims on assets or earnings. 

Subordinated debentures are also known as junior securities. In the case of borrower default, creditors who own subordinated debt will not be paid out until after senior bondholders are paid in full. It is usually larger corporations or other business entities that get into borrowing through subordinated debt.

Besides ‘debentures’ which can be counted as subordinated debt, the IRDAI has empowered itself to specify any other instrument as a subordinated debt.

Preference shareholders do not have the right to vote, but they provide such shareholders the special right to claim dividend in the lifetime of a company. Also, they could claim the assets in case of wind up of the company.

EXPERT TAKE 

Srinath Sridharan, Corporate Advisor, said: “The proposal is bold in expanding the pool of capital / debt to foreign players. It also indicates coming of age of Indian insurance players with ability to access debt from global sources. Since the subordinated debt will be listed in Indian bourses, it will also allow for governance mechanism and liquidity-based market pricing.“

Not only have foreign investors been allowed to invest in the ‘other forms of capital’ (preference shares and subordinated bonds), even domestic insurance companies can now do so in such instruments issued by other insurers. The only stipulation is that an insurer cannot invest in the ‘other forms of capital’ of another insurer having a common promoter.

Indian promoters of insurers can also invest in preference shares or subordinate debt, IRDAI has said.

The new regulation, however, stipulates that a foreign re-insurer’s branch would not be allowed to issue these instruments. The new IRDAI norms also specifies the minimum reporting and disclosure norms.