Traditionally, PE firms have an entry and exit strategy for companies that they invest in. The regulator doesn't want volatile investments in the sector.
Insurance Regulatory and Development Authority of India (IRDAI) will make a proposal to its Board on November 29 which seeks to allow private equity (PE) firms to promote insurance companies.
“We will be allowing PE founders to be promoters for which we are issuing guidelines and are going to our Board for approval. We never had allowed it in the past,” said a senior IRDAI official.
Sources said that not only will the guidelines have a minimum time limit for PE firms to stay invested in the insurer, there will also be norms around the commitment of additional capital as and when required. This will be discussed in the IRDAI board meeting on November 29.
In September 2017, IRDAI Chairman TS Vijayan had said that short-term investments including those by PE firms are under discussion and added that the regulator may arrive at a decision in a month or so.
On the one hand while some PE firms have approached IRDAI to promote insurance companies, there is also a proposal for the existing promoter wanting to exit the company and sell the stake to a PE firm.
Traditionally, PE firms have an entry and exit strategy for companies that they invest in. To ensure that the stability of an insurance company is not compromised, the regulator will bring out detailed guidelines giving out circumstances under which a PE can enter or exit an insurer.
“We have proposals, including where the shareholder wants to quit and POE wants to enter and another where PE itself wants to start an insurance. Instead of going case by case, we are going to the Board and issuing guidelines on it,” said an official.
As per current regulatory norms, firms holding 10 percent or more in an insurance company are classified as promoters while those holding less than that are called investors. PE-VC firms, unlike promoters, invest in companies based on business prospects and exit when the returns do not correlate to the investments.
IRDAI follows a principle of issuing exposure drafts for all new regulations. Only after the comments of all the stakeholders are received do they bring out final guidelines.It is anticipated that the past track records of the PE companies and their investments will also be looked into while assessing the proposals to promote insurance companies.