Insurance regulator IRDAI has sweetened the deal for Private Equity (PE) players by not only enabling their direct entry into insurers, but has also made exits smoother for PE/VC Funds that are ‘promoters’ of unlisted and listed insurers.
PE players who have taken up the ‘promoter’ role in insurers can now dilute their holding up to 26 per cent in listed companies which have a satisfactory five year solvency track record, according to new regulations issued by IRDAI.
Hitherto, the rule was that ‘promoters’ of insurers needed to maintain minimum shareholding of 50 per cent in an insurer at all times (or if already below 50%, then such holding was minimum holding).
Attracting investments
Now a carve out (proviso in regulations) has been made to facilitate dilution of promoter holdings to 26 per cent in case of certain listed companies.
This move is expected to help attract significant investments from PE/VC Funds in insurance sector as having smooth ‘exits’ are as important as ‘entry’ for such Funds.
PE funds can enjoy the flexibility of diluting holding to 26% even while retaining their promoter tag, say experts, adding that IRDAI may now be even open to bringing their holding to ‘nil’ if an alternate acquirer can step in their place as promoter.
This IRDAI move is expected to nudge unlisted insurers to look at listing as large levels of PE monies can be attracted as capital with this exit flexibility in place. Typically PE funds look at ‘exits’ through initial public offering in the form of ‘offer for sale’. Once listed they could do further dilution through sale of stake in secondary market.
Exit route
In India, in recent years, there have been instances where PE/VC Funds have taken controlling stake in insurers and become promoters (with over 50% holding). Now they can look to dilute all the way to 26 per cent or even exit completely in certain situations.
Niren Patel, Partner, Khaitan & Co, a law firm, said that IRDAI’s clear message through the new Registration Regulations is to encourage the insurance industry to move towards listing in the near future.
The flexibility provided under the said regulations for listed insurance companies (for example, permitting a promoter of a listed insurance company that has a satisfactory 5 year solvency track record to dilute up to 26%; relaxation of lock-in to enable insurance companies to list) will provide impetus and an accelerated path to listing as well as provide much needed exit options to PE/VC funds, he said.
Patel highlighted that clarity and flexibility was missing for ‘exits’ under the earlier regime.
He said that IRDAI has clearly laid down the path and intention to attract significant investments into the insurance sector in the coming years, in all types and ages of insurance companies and one can be surely optimistic that the PE/VC industry will pay heed to and act on IRDAI’s incentives and open-mindedness.
Improved flexibility
The new Registration Regulations demonstrate the flexible and open mindset of the IRDAI to attract more investments in the insurance sector and facilitate ease of doing business, Patel added.
Besides allowing PE funds to directly invest in insurers, IRDAI had recently, as part of PE/VC industry-friendly measures, made setting up of special purpose vehicles (SPVs) “optional” for investing into insurers. Prior to this, it was mandatory to set up a SPV for foreign investors to pump capital in insurers.
Investment through the SPV structure that was earlier mandatory for a PE/VC fund wanting to take more than 10% stake (and being categorised as a promoter) has been done away with and has been made optional for new investments. “This is a big shift in IRDAI’s stance for the PE/VC industry and will encourage more funds to invest directly into insurance companies. This flexibility makes life easier and efficient for PE/VC funds and significantly eases their tax and regulatory burden compared to the previous regime”, Patel said.