With private equity players as promoters, the insurance sector could swing it

Insurance companies in India — both life and general — are in the midst of a huge churn. They will add heft to their capital base essentially through induction of private equity funds as promoters and initial public offers that are underway.

Well, both sources of funding will have to be tapped by insurance companies to increase their equity base for funding expansions and get into new markets. At the same time, they can now allow private equity players to become new class of promoters with over 10 per cent equity holding.

For long, sneers and jeers on the proposals within the insurance establishment and the sector’s regulator, Insurance Regulatory and Development Authority of India (IRDAI) had put off any possible induction of private equities as promoter investors.

No, doubt that sale of equity to PE funds would take the capital base beyond the mandatory minimum Rs 100 crore in both life and non-life insurance companies. And those private equity funds that are not keen on playing insurance players could also opt for investment category as stipulated by IRDAI.

Most interesting is IRDAI’s proposal to have a five-year lock in period on private equity funds to provide stability and continuity to the insurance operations of the joint ventures. With more than 18 insurance joint ventures, the opportunities for private equity funds was relatively large given that insurance in India have moved to next phase of growth, expansion, consolidation, mergers and acquisitions.

The two riders proposed by IRDAI for private equity funds are again on expected lines. Apart from the five-year lock in norm, the private equities will have to comply with domestic and private shareholding norms. Insurance Laws (amendment) Act of 2016 stipulates that foreign holding in joint ventures cannot exceed beyond 49 per cent. In effect, private equities seeking to invest in large insurance companies will pitchfork into the rest 51 per cent. Even then, Indian control, character on running these corporations with hefty valuations cannot be compromised.

In fact, more promoters or investors should be roped in through sale of equity in blocks, to make the insurance companies holding highly diverse with no single equity holder having singular control in the joint ventures. Large pension funds and venture capitalists should also be roped in. If corporate analogy has to be drawn, Larsen & Turbo in the infrastructure space shows the way to avoid single group’s domineering control.

IPOs lined up by several general insurance players not only bring fresh funds into their kitty but, have positive impact on their operations becoming transparent, market linked in the general and life insurance space. General Insurance Corporation, Reliance Life, Royal Sundaram General Insurance and HDFC Standard Life are some of the companies that have taken recourse to IPOs to mobilise additional equity funds for their respective companies.

These IPOs have put the insurance sector in the spotlight and have prepared the ground for a big boom given easier regulatory environment and digitisation offering new opportunities. Success of ICICI Prudential offer is a case in point. SBI Life, the joint venture between State Bank of India and BNP Paribas Cardif had effortlessly mobilised $1.29 billion. Though ICICI Lombard General issue was not very optimistic, investors did make a beeline to buy into the $880 million offer. Though the GIC issue was salvaged by another state run insurer LIC, the $1.72 billion mobilisation speaks volumes about the potential for insurance offers. In fact, HDFC Standard Life’s $1.1 billion offer apart from New India Assurance’s $1.5 billion issues may complete the first round of insurance companies campaign to get listed on bourses.

HDFC Life proposed merger with Max Financial Services, IFFCO – Indian Potash decision to divest their stakes in IFFCO Tokio General Insurance have set mergers and acquisitions rolling in insurance sector. More are likely to follow with private equity players making their way as promoters.