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General insurers, with value twice of equity base, can tap public: IRDA

Posted on Sep 19, 10:24AM | IANS

Ten years in business with an embedded value of at least twice the paid capital and maintaining a solvency margin are some of the terms that the insurance regulator has specified Tuesday as for general insurers to tap the share market.

The Insurance Regulatory and Development Authority (IRDA) has come out with the draft regulations for relating to the issue of capital by general insurance companies titled IRDA (Issuance of Capital by General Insurance Companies) Regulations, 2012.

The regulations are applicable for issue of fresh capital and also divestment of shares by one or more of promoters through a public offer for sale.

According to IRDA, only fully paid equity shares can be issued by general insurers and not party paid ones.

As per the draft regulations, prior approval of IRDA is needed before any general insurance company approaches the Securities and Exchange Board of India (SEBI) for public issue of shares and for any subsequent issue.

As per the draft, only a general insurance company that has completed ten years of business from the date of commencement of business or such other period as specified by the central government can raise share capital.

The IRDA's approval to a general insurer will be valid for one year within which the latter has to file the Draft Red Herring Prospectus with SEBI.

But what has surprised the industry officials is the stipulation that the general insurer intending to go public should have an embedded value (simply put present value of future profit of existing business) of atleast two times its paid up equity capital.

"Normally embedded value is applicable for life insurance companies as the policy tenure is spreads over several years. But in the general insurance business the policy term is generally one year. Perhaps the possibility of long tail liability has made IRDA to come out with this condition," an experienced actuary told IANS asking not to be named.

Meanwhile the IRDA has called for comments/suggestions on the exposure draft by Sep 30.