Irda to slash exposure to promoter companies

Draft norms reduce investment ceiling from 25% to 5%.

Insurance companies promoted by corporate houses will not be allowed to invest more than five per cent in group companies, the insurance regulator has proposed.

In its draft guidelines on investment norms, the Insurance Regulatory and Development Authority (Irda) has recommended the overall exposure in promoter group companies should be brought down to five per cent, from 25 per cent.

The move is aimed at curbing the practice of routing funds through insurance arms in group companies. According to current guidelines, an insurance company can invest up to 10 per cent in equity and 2.5 per cent in debt in the promoter’s group companies. Additionally, in infrastructure firms of the parent company, another 12.5 per cent exposure is allowed, which means the total exposure can go up to 25 per cent.

Also, the draft says insurance companies will not be permitted to invest in unlisted debt instruments and/or by way of private placement in the promoter’s group. Insurance players say the regulator is wary of the discounts in prices offered by the promoters, as these issuances are unlisted.

“Investment made in all companies belonging to the promoter’s group shall not be made either by way of private placement (equity) or in unlisted instruments (equity and debt),” said the draft guidelines. The draft guidelines, if accepted, will affect insurance companies backed by large conglomerates such as the Tata group, Birla group, Reliance, etc.

“For instance, the Tata group has a number of blue-chip companies and it is quite natural for Tata AIG Life, its life insurance arm, to have investments in these companies. If the draft guidelines are accepted, then it will severely restrict their investment practices. The same can be applied to the Aditya Birla Group-promoted Birla Sun Life, as well,” says an industry expert. Similarly, bank-backed insurance companies like ICICI Prudential, SBI Life and HDFC Life, too, will have to bring down their exposure in the parent arms to five per cent.

For instance, HDFC Life’s investment in bonds will be impacted, as it has substantial exposure in bonds issued by HDFC Ltd, the promoter group.

When contacted, a senior Irda official confirmed the development. He said the proposed measures should not come as a surprise to insurers, as when the sector was opened to the private sector in 2000, the exposure for promoter groups was capped at five per cent.

“Originally, the exposure limit in the promoter’s group was capped at five per cent. In between, it was raised to 25 per cent. But with the inherent risk associated with exposure in a conglomerate, it is advisable to bring the limit back to five per cent,” the official said.

However, he added, the regulator was open to suggestions, as some companies were going to be affected more than others.

Industry sources, who did not wished to be named, said capping investments in unlisted issuances was justified but if investments in “good” companies were restricted, the policyholders’ returns might be impacted. The argument regarding the inherent risk associated with the promoter’s group did not hold true, as some of the conglomerates had diversified businesses, they added.

Apart from the exposure in the promoter’s group companies, the insurance regulator is likely to keep the exposure limit in a single company unchanged at 10 per cent. This means the investment practice of the largest life insurance company in the country, Life Insurance Corporation of India (LIC), will remain largely unaffected. LIC, one of the largest domestic institutions in the equity market, had invested Rs 43,000 crore in the equity markets in 2010-11. At present, it can invest up to 10 per cent of capital employed by the investee company or 10 per cent of the fund size in a corporate entity, whichever is lower. The capital employed includes share capital, free reserves and debentures or bonds.