Insurers can hold only 5% in promoter company, stipulates new insurance ordinance

Image ceiling for investmentThe new insurance ordinance stipulates that no insurer can acquire more than 5% in the promoter company but gives them some leeway on holdings in other firms. The Insurance Act 1938 does not prescribe any limit on how much of its parent company an insurer can own.

To be sure, the Insurance Regulatory and Development Authority (Irda) has fixed a ceiling of 5% of the total-owned fund of the insurer. Experts said that the move to fix a 5% cap is aimed at preventing a contagion risk and preventing subsidiaries from propping up the shares of parent companies.

At the same time, the ordinance has done away with the existing 10% cap on the equity stake that insurers can hold in other companies. Instead, it gives regulator Irda the discretion to fix a ceiling on investments in other companies.

The Insurance Act 1938, which currently prevails, says that an insurance company can acquire 10% of the issued capital of a company or bank or 10% of its own investible funds, whichever is lower. In the past, Irda contemplated a higher investment limit to accommodate Life Insurance Corporation (LIC) of India, which had crossed the 10% investment cap.

Traditionally, LIC had been holding sizable equity in several companies at the behest of the government. Any move to lower the stake to below 10% would have resulted in a sharp reduction in share prices. To prevent this, a special dispensation was made for LIC under Section 21 and 46 of the LIC Act giving absolute powers to the central government on matters relating to the state-owned company, including investments. LIC manages a corpus of Rs 20 lakh crore and has crossed the equity threshold of 10% in several banks One expert sounded a warning.

“If Irda is not firm, powerful corporates can arm-twist Irda to approve large investments in a single company,” said Srinivasan Kalambur, former whole-time member of Irda. Others said that the cap of 5% on a promoter company and removal of the 10% cap on holding of another company complements each other.

Source: ET