Experts demand rules for stake dilution in insurance firms


Chennai : The Indian government should come out with rules such as setting a time frame for the dilution of excess stakes held by promoters of life insurance companies as many of these firms are about to complete 10 years in business, say experts.

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The sectoral regulator, the Insurance Regulatory and Development Authority (IRDA), Dec 1 announced the “Issuance of Capital by Life Insurance Companies Regulations, 2011”, governing the dilution of excess shareholding by Indian promoters of life insurance companies under Section 6AA of the Insurance Act, 1938.

As per the guidelines, a promoter of an Indian insurance company has to bring down his stakes in the company to 26 percent in a phased manner after a period of 10 years from the date of commencing business.

Shareholding over 26 percent of the equity shares is termed as excess shareholding.

At present, a foreign partner’s holding in an insurance company is capped at 26 percent. The insurance sector was opened up in 2000.

According to legal experts, the IRDA has come out with the regulations that prescribe the “manner and procedure” by which promoters of life insurance companies can divest their “excess shareholding”.

“Now it is imperative for the central government to come out with rules under Sec 6AA (1) of the Insurance Act as early as possible as many insurance companies are at the threshold of 10 years of existence, both in life and non-life sectors,” D. Varadarajan, Supreme Court lawyer who specialises in company and insurance laws, told IANS.

He added: “There should not be a regulatory vacuum in this regard.”

A senior official of a private life insurance company preferring anonymity said: “The Insurance Act or the IRDA regulations does not prescribe any condition that companies should list their shares. The companies are free to decide on the manner of stake dilution. The promoters can bring in additional major shareholders.”

He said the stake dilution can happen by any one of the following means: (a) public issue of capital, (b) divestment of promoter equity through public offer for sale, and (c) private placement, including transfer of shares.

Citing the weak share market sentiments, life insurance officials say companies may not come out with any public issue now but may do so in 2013.

“Our new business is down as compared to previous year. Further, the share market is also down. The valuations will not be great for the promoters to dilute their stakes now,” an official of a private life insurer told IANS.