Last Updated : Mar 06, 2018 07:50 PM IST | Source:

Minimum lock-in for PE firms could be deterrent for investment in insurance

PE-VC firms, unlike others, invest in companies with healthy business prospects and exit when the returns do not correlate to the investments.

M Saraswathy @maamitalks

The minimum lock-in of five years for private equity players to enter the insurance space as promoters of companies could be a deterrent for players wanting to make a quick buck.

A senior official said that the new regulations under Insurance Development Authority of India (IRDAI) will allow private equity (PE) firms to promote insurance companies provided they commit to the investment for a long term.

Amidst reports that PE firms are showing interest in insurance companies, there is also a caveat that they will have to stay invested for a longer duration.

A report today said that a private equity consortium led by WestBridge Capital Partners, Prudential in partnership with the private investment arm of Wipro chairman Azim Premji, and ICICI Lombard have emerged as three strong contenders to acquire Star Health and Allied Insurance.

Once IRDAI has a new chairman, further clarity is expected to emerge around the regulations allowing PEs to invest as promoters in insurance companies.

PE firms typically have a shorter life-cycle of investments and they cash out as soon as they see a deterioration in the business quality.

Unlike other businesses, sectors like insurance require a longer gestation period for at least 10 years for an entity to start making money. Further, the business is highly cyclical, leading to long periods of losses followed by one quarter of profit.

The idea of the regulator is to have more stability in the system and prevent inflow and outflow of money from the industry on an abrupt basis leading to momentary disruptions.

IRDAI has said that it will allow PE/VC to become promoters of insurance companies with a five year lock-in period, only do so through a special purpose vehicle (SPV).

Further, they have to abide by the Indian-owned and controlled guidelines, meaning ownership should be majority Indian and any board decision would also need to have a go-ahead from the Indian shareholders.

Unlike existing relationships, once PE/VCs enter the insurance space as promoters, they will also have to commit additional capital as when it is needed.

Insurance is a capital heavy business and requires regular fund infusion to keep the growth momentum running. Depending on the size of the company, an insurer could require anywhere between Rs 50-250 crore a year to leverage and build the business.

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 other promoters, invest in companies with healthy business prospects and exit when the returns do not correlate to the investments.
First Published on Mar 6, 2018 07:50 pm
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